How To Become A Successful P2P Investor
P2P investment may no longer be a nascent industry in India but investor scepticism still lurks large in this high return financial instrument. Shrewd P2P investors in the RupeeCircle platform have got returns of up to 36% (average annual return is in excess of 24%). Individuals with investible surplus can earn high returns and also opt for a monthly income source. But to get good returns one must perceive the nuances of P2P investment. Here are some tips to make P2P investing your forte: –
Tips To Be A Successful P2P Investor
Start P2P investment
The secret to a successful P2P investment is to start a P2P investment. Pessimism towards this alternate investment avenue should not entail skipping it altogether, but to tread carefully during the initial stage.
Similar to the SIPs of mutual funds, P2P investments can be started with an amount as low as Rs5,000 (and then increased gradually). But unlike mutual funds P2P investments are not that hard to fathom. Perusing the RupeeCircle marketplace for a few minutes will paint a good image of the investment route.
The wealth managers always recommend investors to diversify investments to lower risk and increase returns. A P2P investment portfolio must be like an assorted bouquet – it must consist of different principal, tenure and interest rates. Investors should lend to borrowers from different locations and professions.
Understand risk category
All P2P lending firms list the risk category of loan applicants on its marketplace. For example, RupeeCircle assigns its loan applicants a risk grade of A to F (A being the least risky and F being the most risky thereby the most profitable for investors). However putting all your eggs into the high risk F category is a risky move. That’s where the aforementioned diversification comes in handy.
How many borrowers can an investor fund? There is no limit. An investor can fund as many borrowers he/she wants, but the main question is how many can an investor handle. If an investor is comfortable handling 50-100 borrowers simultaneously then they can definitely fund those 100 borrowers. However, it would be best to fund 20-40 borrowers of different risk category and loan tenure. The automated systems and wealth managers at RupeeCircle make it easier for an investor to lend multiple borrowers. It is also worth mentioning here that investors who fund more borrowers have higher returns regularly. But it all comes down to individual risk appetite.
Do not enter P2P investment with an only-profit mindset. The returns on P2P investments are high but a few defaults in the investor portfolio will bring down the returns and sometimes even rub off the principal. Investors must be realistic in their expectation of return, because P2P just like every other investment avenue has a certain risk associated with it.
P2P investments should only be made through RBI licensed (NBFC-P2P) platforms to maintain transparency of operation. While choosing a platform ensure that it has a registration certificate, an escrow account for transaction, and tools to make calculated decisions. A registered platform that adheres to RBI guidelines will ensure fair and transparent financial practice thus safeguarding investor money.
Loan applicants have to undergo stringent credit underwriting process before they are listed in the P2P marketplace as a borrower. Different P2P companies are carving out their own niches but the underwriting process of all of them is top notch. The investor should choose a platform with recurring borrower listing.
Compound through reinvesting
An average annual return of 24% is achievable only if the accrued interest from one borrower is reinvested in other borrowers in the platform. If an investor withdraws the returns and a default occurs in their portfolio then the monetary loss would seem enormous. Besides, by reinvesting the investor gets to compound their investment.
Tax on the interest part received from the EMI of a P2P investment must be filed under Section 80 (C) as per law. It is not only the trait of a responsible citizen but also timely tax filing add to wealth creation in the long run.
Check this article for how to choose a borrower for P2P lending.