How To Invest Rs. 20,000 On A P2P Platform?
India is a billion-strong nation and yet, as per reports, only 18 -20 million of them make investments of any kind. When it comes to investments, mutual fund is the second preferred choice of investment for Indians followed by the derivative market. Savings account and fixed deposits is still the most reliable form of investment for most Indians. Alternative investments including P2P platform are still not on the radar of most people.
Although the urban and educated Indian is au courant about the perks of investment, the thought of putting money in any other investment vehicle other than savings account is rebarbative for most. It is but a proven fact that fixed deposits and recurring deposits yield meagre returns to the investor whereas stocks and mutual funds gives high ROIs. And then there are alternative investment models including P2P lending which are nascent to the Indian market but yield higher ROIs than other investment vehicles.
The scope of growth for P2P lending is extensive and it is better to fathom how this new investment model works at the earliest. Investments in a P2P platform can be started with an amount as less as Rs5,000, but it is always recommended to start with higher amount to diversify investment across various borrower categories.
Let’s start with an amount of Rs20,000 and diversify it across 4 different borrowers (Rs5,000 per borrower). There are 6 categories to choose from – A, B, C, D, E and F. Category A comprises of people with good credit and social scores, and hence deemed capable of repaying the loan amount. Consequently this category carries a low rate of interest for the borrower; hence offer lower return on investment to the investor. Category F lies in the other end of the spectrum.
(Although the lender has the liberty to choose the tenure of the loan, for the sake of simplicity in this example we will only choose tenures of one year. Also, the interest rate is fixed rate of interest. In this article we will not focus on the borrower profile and the purpose of the loan – we have covered these topics in our other articles)
Earmark the first 5,000 to category B, one of the safest categories to bet on. The interest rate on this loan is 15% (average). As per the RupeeCircle Loan Calculator the EMI which the lender will start receiving from the first month onwards is Rs451. The total payment received at the end of the loan tenure (1 year) would be Rs5,415.
The second allotment can be made to the category C with an interest rate of 22%. The lender will start receiving an EMI of Rs468 and the total payment will amount to Rs5,616 in a year’s time.
The third allotment can be made to Category D with an interest rate of 28%. The lender will start receiving an EMI of Rs483 and the total payment will amount to Rs5,790 in a year’s time.
The last allotment can be in the high risk Category F with an interest rate of 34%. Here the lender receives an EMI of Rs500, and a total payment of Rs5,998.
At first look the EMIs may not seem much but therein lays the magic of reinvestment. The money received as EMI (from the first month onwards) will be credited to the P2P wallet which should then be reinvested in other loans. The amount should not be left idle in the wallet and should be used to fund borrowers every month. This will compound the returns every month and increase the ROI after a year.
Regular investment in a P2P platform over a period of time has a potential to deliver an annual average return of over 24%, more than stocks and mutual funds, and definitely more than the traditional investment options offered by banks and post offices.