P2P Lending Vs Other Investments
While savings, fixed deposits, real estate, stocks & gold have been the traditional investment options in India, Investors are now looking forward to explore alternate investment asset classes. This got apparent in the rather short-lived & unsuccessful crypto currency phenomena where bulk of new age investors & young millennial parked their funds.
However, with the rapid advancements in financial technology there are many other alternatives which have emerged to impact the investment landscape in India.
One such investment opportunity is Peer-to-Peer (P2P) investments where the risk return trade-off as well as the product structure fits in line with expectation of Indian masses.
In this article, we have collated certain key elements while considering multiple investment options. Let us have a look at them to bring out a comparative study which can be useful for facilitating an investment decision.
Savings accounts and Fixed Deposits
This is considered to be the safest investment option; however the returns on fixed deposits and savings are quite low. While savings account provides 4-5% annual returns, fixed deposits yield 6-7% returns and both these options at times are not able to beat inflation. These options can be good for parking funds for short term requirements or to keep money for emergency.
The flipside with savings & fixed deposits is that leaving substantial amounts in cash accounts over the medium or longer term does not help in building wealth. In-fact the value of our savings is reduced by the rising prices of goods and services.
Buying your own home
Investing in real estate can generate a return in two ways: income yield (rent) or capital appreciation.
Currently this sector is facing an uncertain future as there is substantial unsold housing stock across property markets. Further the requirement of initial capital, lack of liquidity & longer tenure of investment to get returns act as key negatives for this asset class.
Stocks & Mutual Funds
Shares are the most well-known type of investment and involve owning a fraction of a company and therefore a proportion of the company’s value. Investors can either own shares directly or invest collectively with other investors in a mutual fund. Investors with shares become shareholders in the company and benefit from the profits of the company that it makes known as dividend and from rise in price value of shares.
Investing in shares carries risks, as the value of the investment can fall if the share price falls. This can be affected by economic conditions or the poor financial performance of the company. Investing in one particular company requires time and research whereas investing in a mutual fund which buys shares in wide range of companies spreads the investment risks.
Equities and Mutual Funds require knowledge of market which is sometimes difficult for common investors. This option is still considered generally by financially savvy people and volatility in the stock market keeps away a lot of investors.
However, equity offers better chances of beating inflation over the long term & build wealth.
Bonds are considered to be one of the safest forms of investment as they pay a fixed rate of return.
Bonds are a type of loan that you provide to governments or (usually large) companies for a specified period of time, which they promise to repay along with a fixed interest income.
However the chances of beating inflation are lesser than equity and better than savings account as well as fixed deposits.
Gold has been one of the favorable options of investments in most household in India for generations. Besides being an investment asset, there are multiple perceived values offered by gold.
However in real terms, there are multiple costs attached to Gold prices for e.g. storage & insurances costs, mark up costs in purchasing & selling.
Mostly gold has been used as one of investment options to hedge against inflation.
Peer-to-peer lending (P2P)
This involves lending to businesses or individuals through an online platform, alongside other private investors. There are risks like risk of default, delayed repayments etc. However, investment returns for P2P have been really attractive – ranging anywhere between 18-30% annually.
The process of investment is comparatively simple with no middlemen. You can register online using your desktop or smartphones & start investing within a few minutes.
You then create your portfolio by shortlisting options from a list of borrowers. The investment decisions are data backed which are provided by the platform & the collections as well as payments are taken care of by the P2P lending company.
One unique feature of P2P investments is that you can start with as low as INR 5000.
To reduce risk, P2P platforms recommend investors to diversify and mitigate risk by lending small amount to as many borrowers as possible. To summarize,Peer-to-Peer (P2P) lending has potential proven value propositions offered over the last decade which are now attracting Indian masses. Mentioned below are comparisons across key parameters for various asset classes-