You have a lumpsum amount to invest for the short-term, but you are not really sure which instrument to choose. The returns on FDs are too low. PPF is giving slightly higher returns but the lock-in period dissuades you. Need not worry!

There is an investment product that may fetch you double the FD and PPF returns in the short-term. This is P2P lending. All you have to do is sign up on a P2P lending platform which will connect you with a spate of borrowers. You may lend your money to a set of borrowers and earn interest on the same.

This article will cover the returns aspect of P2P pending. Read the following article to get a detailed understanding of what P2P lending is:

Attention millenials! Learn all about peer-to-peer lending

When you register with a P2P lending platform, you will find lakhs of individual or MSME borrowers. Some will have higher credit score while others on the lower side. High-credit-score borrowers get loan at a lower interest rate compared to those with lower credit score. The interest rate may range between 12-36 per cent on an average.

You may lend all your money to a single high-credit-score borrower or among a set of such borrowers. You may mix and match different categories of borrowers. Divide the lending amount among various risk profiles. This will give you better returns.

P2P lending platforms give you two options to build your lending portfolio. Either you can select the borrowers on your own or you allow the system to generate a customised portfolio for you. While the platform does provide you detailed profiles of borrowers, analysing them all could be cumbersome. So far as system is concerned, it allows you to put up return expectations and accordingly build a diversified portfolio for you.

For example, if you wish to earn 13-14 per cent, it will pick up moderate risk profiles. However, if return expectations are more than 20 per cent, the borrowers’ profile will turn riskier. One may choose the return expectations as per one’s risk appetite.

Difference between RoI and net returns

You do not earn the full interest rate on which the borrower is lent the money. The P2P platforms charge nearly 2 per cent commission on the same. RoI is overall return that your investment generates, while net returns are calculated after subtracting the platform charges. You may need to check with respective platforms if the portfolio return visible in your account is RoI or net return. What you should focus on is net returns – not RoI.

Conclusion

Wondering what if the borrowers do not return money? Default risk indeed exists. This is why a well-diversified portfolio among various risk profiles is advisable. If you have Rs 1 lakh to lend, instead of lending 20,000 to five borrowers, you should lend Rs 2000 to 50 borrowers. Even if 4-5 borrowers do not return your money, you may still earn nearly 9-10 per cent net returns. The more money you will have, the wider could be your diversification. The crux lies in customising your portfolio. This is where our role comes. On no extra charge, we help you with creating a diversified portfolio. Give us a call to know more about the product @ 8178271045