How P2P Investments Compare With Other Investment Avenues In India
The fundamental concept of saving in India has undergone a shift from traditional assets to newer ways of investing. Due to rising inflation, savvy investors are looking at alternative investment asset classes that can beat inflation. Portfolio diversification and better risk-adjusted returns are some key drivers for looking at such alternative options.
One investment opportunity that has emerged in recent years is Peer to Peer (P2P) lending. To diversify their investments, investors are now studying and comparing investment avenues like P2P lending with other options.
To compare and contrast the merits and demerits, let’s observe some of the top investment choices available today:
P2P lending versus stock markets
Pros of stock markets over P2P lending: Stock Markets provide inflation-beating returns over a long period. You can gain inflation-beating returns if you understand the risks and how the market work. Stocks are easy to buy and sell due to their liquidity.
Cons of stock markets over P2P lending: You require specialized knowledge or understanding of the market dynamics. Novice investors may not be able to generate inflation-beating returns as it requires them to understand the market sentiment and dynamics. Stock markets are highly volatile in nature. If you are a short-term investor, then you might stand a chance to lose due to their volatile nature. While long-term investors do reasonably well, they do need an aptitude to pick good investments that appreciate over the long run.P
Pros of P2P lending over stock markets: P2P lending is a high return investment option too. Using an online marketplace, you can offer loans to borrowers online while eliminating intermediaries and earn an attractive interest rate, in the form of EMIs. If you spread out your investment smartly across borrower profiles, then you create a secondary income stream. By reinvesting your earnings, you can even compound your capital growth and earn better.
Cons of P2P lending over stock markets: You need to study the P2P lending platform, to know how the borrower profiles are rated. There is always a possibility of default and if you do not split your investment across borrowers, you can lose your entire capital. While there is no volatility, you still need to understand the platform and processes well.
Real Estate versus P2P lending
Pros of real estate over P2P lending: Real estate offers you security in terms of residential properties. Real estate also offers diversification value as far as asset allocation is concerned. Income can be built because of the appreciation in value of the property, and also in terms of rental yield. Rental properties can usually provide a steady cash-flow and build a passive income stream. In favorable markets, there is a high appreciation of your assets.
Cons of real estate over P2P lending: It is time and labor-intensive to buy, sell and rent properties. There are also ongoing maintenance issues. Moreover, with real estate you can’t start small, you need to have a sizeable capital for investment. Additionally, real estate is notorious for challenges like title clearance, lack of transparency etc. Real estate is not a liquid asset and you might have bid your time. This can be difficult if you need cash urgently.P
Pros of P2P lending over real estate: It is extremely quick and easy to become a lender on an online P2P marketplace. You can start small and don’t need a large investment. It is a modern, tech-driven system where you can use an auto-investment tool to diversify your loan and earn a decent secondary income. You can assess the creditworthiness of the borrowers by studying the borrower profile on the platforms and use data to make informed decisions. Automated tools can also enable a ‘What-if’ portfolio option to simulate the performance of loans in various risk scenarios.
Cons of P2P lending over real estate: In terms of liquidity, P2P lending has neither short-term nor fully long-term lock-in. You need to be digitally savvy and understand the platform to operate your account optimally. A fair number of loans on P2P platforms are unsecured loans. There is a risk of default if you don’t choose the borrower well.
Gold versus P2P lending
Pros of gold over P2P lending: Gold and silver have always been favored as investment options in India. In recent years, bullion performance has been favorable, thereby luring investors to invest in gold. Gold Exchange Traded Funds (ETF)s are a new asset class that has emerged recently. Investing in both gold and gold ETFs is considered a safe, easy way to diversify your portfolio and hedge against inflation. Gold is also negatively correlated to stocks and other instruments. Another point in favor is the high liquidity of gold and gold ETFs.
Cons of gold over P2P lending: Investing in physical gold can pose storage or theft risks. Investing in gold jewelry means you also pay for making charges and wastage charges, which is an unnecessary cost. You might be subjected to brokerage charges or management fees if you are investing in Gold ETFs. As an asset, there is no steady cash-flow or passive income from gold. Also, the price is subject to change depending on the international market where dollar pricing plays a vital role. If you are investing in ETFs, the fund holds derivative contracts (backed by gold). This means you can only trade the fund for money and not physical gold.
Pros of P2P lending over gold: There is no physical storage of assets. All your trading occurs online with the ease and convenience of a mouse click. You can study the risks and adjust your investment as per various risk buckets to earn risk-adjusted rewards. If you invest wisely, you can build a great secondary income or re-invest the EMIs and benefit from the compounded growth.
Cons of P2P lending over gold: It’s a relatively new concept for Indian investors. There is not enough awareness on the subject. There are risks in terms of loan defaults. Though, these can be avoided by building a balanced loan portfolio and investing on several platforms.
As you can see that all investment instruments have advantages and are prone to shortcomings like liquidity, volatility, defaults, and low returns. It is necessary to study the suitability of each investment that will match your requirements. Understand the risks of each investment vehicle and build a diversified portfolio to optimize your investment.