3 Reasons, Why Financial Advisors Should Consider P2P Lending for Investors’ Portfolio
Attention Financial advisors:
Here are 3 reasons why you should consider P2P Lending for your investors’ portfolio
“Tell me the investment that offers the best returns.”
As a financial advisor, you have heard the above statement umpteen times from prospective investors.
What are the options you usually offer?
Stocks? Mutual Funds? PMS? ULIP? Corporate Bonds?
If you leave aside corporate bonds or deposits, all the other options share some common characteristics:
- Volatile in nature,
- No fixed income and
- No guarantee or safety associated with them.
“Higher returns come with higher risk after all” can be your confident response.
“One can expect a 12% to 15% returns as an average over years, but that is not guaranteed.“ You have been saying this to your investors, forever.
Now take Corporate Bonds and Deposits. One of the recent issues by a housing finance company offered 9.2% return on its Non Convertible Debentures for a period of 3 years. Not to mention, this interest rate was a rare offer.
While the interest rate is attractive, it goes without saying that it comes with a 3 years lock-in.
“You have to lose some to gain some.” Is this how you will explain it to your client?
Frankly, your investors deserve a better deal. They deserve an investment option that gets them –
- High fixed returns
- Regular payouts / income
- Safety of Investment
And you as an advisor have an access to this investment.
We are referring to Peer-to-Peer (P2P) Lending.
P2P lending is not an unknown term today.
A P2P lending platform is a marketplace where lenders meet borrowers. Lenders are those who are looking to invest money for better returns.
Your clients can register on a P2P platform and they can start lending money as personal loans to verified borrowers.
The interest rates on offer range from 12% to 30% based on various categories of borrowers. The rates are fixed and payouts are regular.
P2P is not new to India. In 2006, the world’s first peer-to-peer (p2p) lending platform, Zopa began operations in the UK. Since then peer to peer lending has spread rapidly across the globe.
Soon after Zopa was launched in UK, LendingClub was started in US. Another company called Prosper followed it. The trend quickly caught on in other countries too such as Australia, New Zealand and China.
Today, US has the highest amount of funds lent through Peer to Peer segment while UK ranks no. 1 on the basis of highest per capita loans.
So much so that peer-to-peer lending is now one of the favourite borrowing option for several people and an equally favorite investment option for investors.
India too is fast catching up to this phenomenon. By 2020, the size of peer to peer lending in India is expected to be at Rs. 30,000 crores.
Even The Reserve Bank of India (RBI) has taken note of this growing and innovative offering and recently come out with draft guidelines for regulating Peer-to-Peer Lending. You can read those regulations here
So, how is Peer-to-Peer Lending helpful to your investor clients?
3 Big Reasons
First, clearly the returns to be made here are higher than what most fixed income investments would offer. That’s what the investor is looking for, isn’t it?
Second, you as an advisor can help your investors to generate regular fixed monthly income for themselves.
Let’s take up this via a simple example – generation of regular income.
Typically, when we talk about regular income the investment options that come to mind are Fixed Deposits, Corporate Bonds, Debt Mutual Funds, High Dividend Yield Stocks, etc.
However, as just pointed out a while ago, investors would have to make trade offs with each of these investments. Trade off among safety, returns and flexibility.
That’s where Peer to Peer or P2P lending comes into picture.
Can p2p lending be the answer to regular income for investors?
Have a look at the table below:
The average rate of returns has been arrived at by assuming that 75% of the investments are made in Fixed Deposits, Post office schemes and Debt Mutual Funds and only 25% is invested via P2P lending.
The compounding has not been factored in as it is assumed that the returns / interest will be withdrawn.
Now, the data need not be explained to you.
What is clear is that the investor can generate more returns from the existing corpus of funds. High, fixed and regular income – in some cases, it is the ultimate source of passive income that the investors are looking for.
We haven’t yet mentioned about third and a very important feature, the safety.
What it means is that in case a borrower defaults on loan repayments, i2ifunding would refund upto 100% of the principal to the investor. This can vary based on the risk category of the borrower. It is a minimum of 50% even for the most credit unworthy borrower.
How soon will your investor’s portfolio have p2p?
P2P lending offers a compelling option where investors get 3 big benefits – high returns, regular payouts and safety of their investments.
Not just that, there is a completely transparent process that enables the investor to view, evaluate and lend to verified borrowers as well as track the entire portfolio online.
As an advisor, you too can take a lead offering your investors an option to invest via P2P lending.
It is completely understood that it may not be suited for every investor but there is a section that can benefit from this opportunity.
As an advisor, you have been at the forefront in offering the most relevant investment options to your investor clients. It’s time you consider p2p lending too.