Bad Habits To Break Before You Become A Successful P2P Investor
A smart investor is one who can maintain the balance between attractive return rates and risks and knows how to diversify with the right financial product. There are many alternative asset classes that can enhance your investment strategy and portfolio. For instance, peer-to-peer (P2P) lending enables you to loan money directly to borrowers on an online platform by cutting out the middleman (the bank or the lending company). Investors can make additional income in the form of the principal and the interest that is paid back in the form of EMIs.
There are many advantages to becoming an investor on a P2P platform including higher interest rates in comparison to banks, a charitable aspect to lending, and the ability to choose your borrower. However, if you are a novice investor, there are some bad habits and investment mistakes that can prove to be costly.
Here is how you can steer clear of bad investment habits and have a successful run as a P2P investor:
Bad Habit #1: Not doing your homework
Eagerness to get on board with P2P investments does not mean that you should register at the earliest opportunity on the first available platform. Study the P2P lending market and understand how the platform works. Make sure that you are aware of the dos and don’ts of investing online. Invest time in understanding the technology and the regulations on P2P platforms.
Choosing the right P2P platform is equally important to protect your investment. When you make the final choice, ensure that you go with a P2P platform that is registered as a non-banking finance company (NBFC) P2P.
Bad Habit #2: The lure of high returns
Some P2P platforms and borrower profiles provide relatively high interest rates. Do not invest with the sole objective of earning very high returns. High reward profiles typically carry the highest risks.
Instead, start slowly with a small amount of capital and measure your success in the investment plan. Once you develop adequate knowhow, you can build your investment based on your risk appetite.
Bad Habit #3: Focusing on short-term returns
While P2P investments are not a long-term investment; they certainly are not a short-term investment either. If you keep your funds invested over a longer period, then, the returns are quite attractive. The income generated from P2P loans comprises principal and interest payments deposited monthly into the investor’s account. Therefore, it might be tempting for investors to withdraw these returns. This is a common mistake that investors make as it does not allow their initial returns to give compounded returns in the future.
Bad Habit #4: Not diversifying your investment
Don’t put all your eggs in one basket. As an investor, you should try to spread out your risk by dividing each loan into numerous opportunities. Most P2P platforms have made it mandatory to diversify any lending venture among a number of borrowers. Spreading out your investment as widely as possible will mitigate the risks associated with defaults. It will also earn you a reasonably attractive income. Thus, your loan should be divided into 30 ventures instead of three in order to mitigate substantial losses if a default occurs.
Bad Habit #5: Not studying borrower profiles
P2P lending companies assign various risk-grades to borrowers such as high-risk, medium-risk, low risk, etc. The return on investment is directly correlated to the borrower’s profile. Investors who do not study the borrower’s credit profile or those who choose to ignore the risk assessment may end up making poor decisions. Become familiar with the website and narrow your search down using a website’s filters. Find out more about individual borrowers and even ask questions if you require further information. Understand the various risk grades assigned to the borrower profiles and then work out a reasonable risk-to-reward ratio for your investment.
Bad Habit # 6: Being impatient
Delays and defaults are a reality of P2P lending. This means that there will often be delayed repayments. Investors who don’t anticipate the likelihood of delays will be in for an unpleasant surprise when repayments are not made on time. According to RBI norms, P2P platforms have to ensure that their delays/defaults, platform’s average ROI, and their default rates are visible to potential lenders. These statistics will help you get a better idea of your potential income.
Before making any investment decisions, do your own research and don’t get swayed by promotional material. P2P lending presents an opportunity to make healthy returns, provides a reliable income stream, and allows active participation in the lending process. As a savvy customer, avoid the aforementioned mistakes and make the most of the opportunity.