If you are a lender on P2P lending platform, you can easily build a better investment portfolio by diversifying, automating your investment and staying invested for a longer term.
Peer to peer lending in India is relatively a new asset class, but investors are already exploring it to include it in their investment kitty. If you have decided to become one of the personal loan lenders on a P2P lending platform, you would be also looking at building an optimal portfolio to get the maximum risk-return trade-off.
Here are some useful tips to build a better portfolio from P2P lending:
1. Diversify
The mantra of ‘don’t put all eggs in one basket’ applies to lending money online as well.
- The investment amount
Unless you have a specific reason to offer loan to a single borrower or have a small investment size (for example, Rs10,000), you should spread the loan amount over a number of borrowers. So, if you want to invest Rs1 lakh, try to give it to at least 7-10 borrowers. This way, if one of the borrowers defaults, there wouldn’t be much loss to you. Diversify your risk, as simple as that!
- Across the borrower profile
You will find borrowers from different personal, financial and professional backgrounds on peer to peer lending sites in India. They are salaried individuals, women entrepreneurs and even small business owners. So, it would be a good idea to select people from diverse backgrounds while lending money online.
- Across risk categories
Each borrower gets a credit rating from the peer to peer lending companies in India. While, most personal loan lenders would prefer low risk borrower, it wouldn’t be a riskier proposition to lend money to one or two borrowers with medium or high risk rating. So, depending on your risk-return expectation, you can diversify across risk categories.
2. Automate Your Investment
Several P2P lending platforms such as LenDenClub offer automated investment service. If you are an individual or an institutional investor with large investment amount to disburse, then you can use automated investment. Instead of manually looking over each loan or borrower profile, you can save time by applying automated filters and get a quick overview. It also makes easier to manage the account with so many borrowers and huge investment to take care of.
3. Stay Invested
Most personal loan lenders make the mistake of withdrawing the interest return or principal repayment EMIs at regular intervals, even monthly or quarterly in some cases. However, it is advisable to stay invested for a longer period and re-invest the cash flow. This will fetch you more money through the power of compounding.
With a bit of careful planning and logic, you can always build a better portfolio in peer to peer lending in India.