Gone are the days when people used to believe in the traditional modes of investing like fixed deposits, mutual funds, and think that the riskier investments are risking money on shares for a new but great company.
Alternative means of finance are now becoming the way to go for millennials, who want to diversify their investment portfolio and watch their hard-earned money grow.
What are the alternative and safe means of investing?
New investors are gravitating towards investing in cryptocurrency, peer to peer lending platforms and salary overdrafts.
What is a peer to peer lending platform?
Community lending or peer to peer lending platforms (P2P lending) are crowd-funded investment models. India has its own version of the age-old custom of community lending, known as chit funds.
An example of how a chit fund operates
- Ten people start a chit fund by paying INR 1,000 a month for the next ten months.
- Every month, INR 10,000 (the pooled amount) is available for lending. One of the ten people will make a bid to borrow INR 8,000. This person can borrow the amount but also pays their monthly share to the other nine people.
- The members who don’t borrow from the pooled amount benefit from dividend accruals and earn 7 to 10 percent of their investments.
- With this form of investment, the higher the borrowings, the higher the returns at term. Chit funds have taken a new digital form in digital chit fund apps and are also a type of peer to peer lending.
Why peer to peer lending is great for investors?
Peer to peer lending systems like digital chit fund apps is changing the fuels of finance and opening up access to financial support for individuals, micro and small businesses whoever is seeking it.
As an investor, you enjoy all of the following benefits by going P2P:
1. Higher returns in a shorter period of time
Alternative lending is a breath of fresh air for investors who had to work in an environment dominated by a lot of institutional tapes and has moved to space where it is run by platforms that are making the process more effective and scalable. For investors looking for higher returns and willing to risk it on new businesses or individuals looking for a loan, peer to peer lending is the way to go.
2. Risk diversification
Peer to peer lending platforms let you spread your capital across multiple loans, ergo allowing you to better manage your exposure to the risk of loss.
3. Unlike traditional ways of rating an applicant’s creditworthiness
Digital chit fund platforms have begun to deviate from the traditional systems of rating a borrower’s creditworthiness. With the ability to collect and process data at an unprecedented scale, thanks to digitalization. Borrowers can be accessed on their risk value from different data points. This might be a good way for investors to capture the interest of borrowers who don’t fit into the normal metrics determined by national credit bureaus, like small and micro businesses who might be a profitable investment area. The digital platform arranges the documentation for lending and borrowing.
4. You can withdraw your funds at any time
P2P lending not only lets you diversify your portfolio, but it also means that you can easily liquidate your investment within a short period of time. This can be done provided that other lenders are available to replace you in the loans you want to withdraw from. While you need to commit to a longer time for better returns, this flexibility is an attractive choice for investors.
5. Regulated in India
Although peer to peer lending is still at its nascent stage in India, the potential growth has led the Reserve Bank of India (RBI) to impose regulations in 2020. These guidelines help secure the investors’ interests and ensure that their money goes into safe hands.
According to the RBI risk exposure guidelines, stated on its website:
- The cap between one lender and borrower is INR 50,000. One lender can invest up to INR 50,00,000.
- Lenders investing more than INR 10,00,000 across P2P lending platforms need to produce a certificate from a practising chartered accountant – certifying a minimum net worth of INR 50,00,000.
- One borrower can avail of a maximum of INR 10,00,000 across all P2P platforms. All lenders and borrowers need to submit data to credit information companies. The maximum maturity of loans is three years.
6. P2P lending helps you invest in novel business ideas
Traditional means of investment might not be the right option for small and micro-businesses who don’t have great and unconventional business ideas, but not a great credit score. Investors willing to take a risk in these businesses can hit the jackpot if the small business idea succeeds.
Over to you…
Alternative investment routes like digital chit funds in the form of peer to peer lending are helping bank the unbanked. This form of investment’s flexibility and high returns are the critical factors in why this is becoming the investment route of choice for investors and entrepreneurs.