How To Build A Solid P2P Portfolio That Minimises Risks
Leading and managing an investment portfolio can be critical for individual investors, especially if financial planning is not correctly done. Though by doing it yourself you’ll not only stay in full control of your finances you’ll also save a good amount of money in the process.
Solid portfolio management involves building and overseeing a selection of investments that will meet the long-term financial goals and risk tolerance of an investor. In this highly deteriorating market outlook which has shaken the equities market and risky to invest where it’s highly volatile or offer no returns. But this mistake might be affecting the portfolio you are trying to build for years. You may expect much better returns than any debt investment options like Debt Mutual Fund, FD or NCD.
Not sure where to start? Here’s what you have to do:
The current type of market environment can actually make P2P loans one of the best investment options available right now. Even with the uncertainties ahead, it should be possible to generate positive returns from P2P. The ultimate success mantra in building a solid P2P portfolio is below simple 3 strategies.
Maximum diversification of lending amount among many borrowers is default risk mitigation. Optimal diversification can vastly improve the performance of your P2P investments and the portfolio. Spread your investment across a large number of borrower profiles from a different location, gender, occupation etc. Higher the diversity in your portfolio, higher the spread of risk. Auto-Invest is an automated feature introduced by P2P platforms which allocates the lenders’ investment across loans defined by parameters pre-set by the lender. This helps the lenders to build a diversified portfolio faster and more efficiently.
For instance the performance of an investment amount of Rs. 50 lakhs divided into 100 borrowers (Rs. 50,000 each) could be majorly affected by even one default. Whereas, if a similar amount is divided between 2500 borrowers (Rs.2,000 each), a couple of defaults won’t affect the collective returns of your portfolio in a big way. The return on your portfolio is better managed when your investment is spread across a large portfolio (number) of loans and risk category of borrowers. Optimal diversification ensures high returns.
A common mistake made is that you find a few good borrowers who have paid back on time and given good returns, and further plan to take what you have got and exit. But that reduces the size, and any hit on a reduced portfolio from a bad loan would seem bigger. That’s why you must enjoy the benefits of compounding by reinvesting your gains. EMIs, when reinvested, earn further returns. It adds to the returns already made through the original investment. Hence, you get a compounding effect. Data shows that reinvesting can lead to higher net annualised returns.
- Invest for a longer duration
You have to set an investment horizon of at least 12/24 months and continue reinvestment till then. By not reinvesting your repayments, you will bring down your own returns. Withdrawing your funds or not reinvestment your EMI for a minimum of 12 months will lead to negative returns in your portfolio. Under AI, our algorithm tries to create your portfolio in such a way that it matches with the platform portfolio characteristics. It is almost impossible to do it manually.
In P2P, to create a sizeable portfolio, remember the key is to Diversify, Reinvest, and keep an investment horizon of 2-3 years, and definitely you will see amazing returns. We have not seen even a single investor, who follows this, losing any money from his principal or receiving low returns.