New Age Peer-to-Peer (P2P) Investments Versus Traditional Fixed Deposits

Fixed deposits are considered as one of the safest investment options available to investors. It is one of the most common and popular investment options for Indians along with Provident Fund Schemes. Fixed deposits generate a return of 4-8% depending on the tenure. One of the strongest attractions for Fixed Deposits has been guaranteed returns which are not available in many other options.

However with the change in consumer behavior, many investors have now started looking for alternatives to traditional savings accounts to get a better return on their money.

One form of such alternative investment options is Peer-to-Peer (P2P) lending which has emerged globally to provide an additional source of income while offering higher returns & monthly payments.

Let us look at a brief comparison between peer-to-peer lending & Fixed Deposits as investment avenues.

Fixed Deposits  

Banks, Post offices etc. facilitate fixed deposit schemes with multiple term of investment ranging from few months to a few years. The risk is fairly low in line with the returns offered which range anywhere between 6-8% annually.

The interest earned on fixed are however taxable depending on the income slab of the investor.

Peer-to-Peer (P2P) Investments

In case of Peer-to-Peer (P2P) Investment, you start investing via marketplace platform into a selected list of borrowers who pay back the principal amount along with pre-agreed interest rate. The operations, underwriting, verification &collections are facilitated by P2P lending platforms that are governed &regulated by Reserve Bank of India (RBI).

The tenure can range from a few months to few years however the returns are quite high and are credited into investors account monthly. At RupeeCircle, we have been able to provide an average return of 24% with monthly inflows to our lenders.

The Advantages and Disadvantages of Fixed Deposits and P2P Lending are specified below:

Advantages of Fixed Deposits:

1. Fixed Deposits are the safest investment option as they provide guaranteed returns which are not available in many other investment options.
2. Fixed deposits are not affected by market or economic conditions
3. Fixed deposits offer a good option to keep money for emergencies & other requirements
4. Investors can invest amount as low as INR 1000 in for tenure of 15 days or more.

Disadvantages of Fixed Deposits:

1. Low Returns: Returns range from 6-8% which does not help in building & growing wealth.
2. Fixed Deposits won’t earn enough interest to compensate rising prices of goods and services and sometimes are even unable to beat inflation.
3. Liquidity:Returns are received only after the end of the tenure period or maturity date.If the investor wants to exit the investment he has to pay a penalty.
4. Interest Rate risk – You don’t have the option to choose the interest rate at which you want to invest. Fixed Deposits have an inherent risk of interest rate fluctuation and changes over time in sync with bank rates.
5. You may need to physically visit the bank to invest in Fixed deposit.

Advantages of P2P Lending:

1. High Returns – Investing in P2P Lending generates return of 18-30% annually on your investment.
2. Diversification – Risks are controlled by diversifying & selecting across multiple borrowers.
3. Ease of portfolio creation and monitoring – Investors can use smartphones to create portfolio, invest &withdraw funds anytime.
4. Investors can invest loan amount as low as INR 5000 for tenure of 3 to 36 months.
5. Steady monthly returns: P2P investors start getting returns from the next month of investment,providing them an opportunity to reinvest the money to achieve the benefits of compounding.
6. Liquidity: Investors can get early exit from investment by listing their portfolio on the secondary market.
7. Completely online process: Investors can register on the P2P platform and start investing from the comforts of their home. The entire process is online and takes few minutes to complete.

Disadvantages of P2P Lending:

1. The risks are comparatively higher as compared to fixed deposits.
2. Interest is not tax free: With the exception of your Personal Savings Allowance, any interest you earn will be taxed and you will need to declare any interest earned on your annual tax return.