Worried about flat interest rates? Know About This Attractive Avenue?
Alternative investment avenue to get high returns
In the post demonetization phase, banks awash with liquidity are struggling to lend. Thus it wouldn’t be wrong to say that they are suffering from the problem of plenty. Unfortunately, lower demand for funds from banks and other financial institution has now started creating problems for depositors. As you know, the interest rates on bank fixed deposits are toppling down. Those who are in the highest tax slab are now earning negative returns when adjusted for tax and inflation. The fall in interest rates on Small Savings Schemes (SSS) such as the Public Provident Fund (PPF), National Savings Certificate and Kisan Vikas Patra (KVP) has already created discomfort among investors.
And, discomforts lead investors to take wrong decisions.
They have started finding out alternatives to bank fixed deposits. Sensing this as an opportunity to garner more business, some opportunistic investment advisors and intermediaries of financial products are luring them into many risky propositions without disclosing the risks involved.
Some of the frequently recommended investment options are:
- Company fixed deposits with low or no credit rating
- Debt mutual funds
- Secondary market purchase of Non-Convertible Debentures (NCDs) and Bonds
Given the current credit scenario in the corporate world, lending to companies with overleveraged balance sheets and poor business models can prove to be risky. The on-going problem of poor asset quality of banks in the big-ticket loans segment hints at the stress in the sector. It’s unfortunate but “Rating Shopping” by big corporate houses which find it difficult to raise money through banking channel is an open secret.
In such a scenario, how safe will it be to invest your hard-earned money in fixed deposit schemes of companies that may not be able to honor their credit obligations? This is not to say that, financially strong companies don’t borrow from the open market. Of course, they do. But due to their healthy balance sheets and strong business models, they are able to source funds at very competitive rates—close to what banks offer their depositors for comparable maturities. Would you be happy with the average returns? “No” is the likely answer.
Now let’s assess how debt funds are positioned at this juncture. Investors often look at the returns a fund has generated in last six months or on a year’s timeframe. Over the last couple of years, select debt funds have managed to generate 12%-14% compounded annualized returns. But it’s imperative for you to analyse what has resulted in they deliver such a stellar performance. The answer lies in the falling interest rates.
As you may be aware, bond yields and interest rates share a negative correlation with bond prices. In simple language, when interest rates are falling bond prices rally. This is precisely what has happened over last 2 years. But do you think, interest rates can continue to fall at the same pace even in 1-2 years as they have declined in 2015 and 2016? This looks very unlikely, especially when the monetary policy stance of RBI has turned neutral from accommodative. It means, now the RBI will lower policy rates (prime determinant of the interest rates) only if there’s a clear case of a sharp slide in inflation or remarkable improvement in other macroeconomic variables.
Worst is the third option. If you are an individual investor, you should avoid buying NCDs and bonds from the secondary market. To clarify, the primary market is a place wherein investors buy NCDs and bonds directly from the companies while the secondary market transactions happen among investors, without any involvement of the issuer. Coming back to the topic, if you buy a bond with a residual maturity of say 7 years it might pay you 9%-10% interest every year—which is higher than the interest rate offered by banks on fixed deposits. But do you think you will be able to buy that bond at a par value, i.e. at face value at which the company issued it in the primary market? No. You will have to pay a premium now. Again, the reason is an inverse relationship between bond prices and yields. So the current yield of the bond might be lower than the coupon interest rate.
Investing money in chit funds or participating in privately run investment schemes is risky and you should avoid it anyway, irrespective of where the interest rates are heading. So what are the options left? Not many.
The least discussed option is more reliable and profitable than all listed above—Peer-To-Peer (P2P) Lending. Unfortunately, investment advisors aren’t taking it seriously. P2P Lending projects can help you earn anywhere between 14% to 30% returns on your investments.
What is P2P Lending?
P2P Lending is an emerging investment avenue in India. Outside India, especially in the developed economies like USA and UK, P2P Lending mobilises a big chunk of money.
P2P Lending platforms are technologically well-equipped platforms that help borrowers and lenders interact directly with one another, bypassing the banking channel. Unlike in the case of banks wherein depositors have no control over lending operations, investors of P2P lending projects can decide whom they want to lend and the projects they want to skip.
To know more about P2P Lending, You may read these articles:
But as part and parcel of any industry, you may find some non-serious players in the P2P Lending industry too. Over last few years, many new P2P Lending platforms have proliferated, and not all of them are not serious about doing business.
Many of them not only entice investors with a carrot of high-interest rates but also compromise on risk management for getting in more borrowers on the platform.
But not all platforms are alike.
Nonetheless, taking advantage of this situation many “self-proclaimed experts” have been highlighting the problems investors might face by investing in P2P Lending platforms (perhaps without even trying them).
Last year, RBI issued a discussion paper inviting the suggestions from all stakeholders on the need to regulate the P2P Lending industry. But for now, RBI hasn’t issued any prudential guidelines.
The primary concerns raised by doubters is that P2P Lending platforms cater to the funding requirements of those who don’t get unsecured loans from banks. But they fail to explain what makes such investors incompetent to receiving loans. They would struggle to explain if credit assessment processes of banks were so effective, they wouldn’t have been sitting on the mountaintop of bad assets now.
Many a time, inexperienced individual borrowers don’t get a loan because of rigid and inefficient processes that banks follow. Worthy P2P Lending platforms walk an extra mile to ensure each loan is correctly priced vis-à-vis the risk profile of the borrower. And as compared to big-ticket industrial loans, small-ticket retail loans carry a far lower risk, in most cases.
The intent of the borrower to pay is more important than anything else, especially in the case of short-tenured retail loans. Some famous willful defaulters are still managing to take banks for a ride while they are enjoying all luxuries of life. So why look upon any borrower whose proposal got rejected by banks as the potential defaulter, and that too even analysing his/her proposal?
Therefore, a responsible P2P Lending platform should carefully assess each loan project before opening it up for investors.
Your search for such a reliable P2P Lending Platform will end at i2iFunding. It values your money and cares about its safety too.
4 distinguishing factors that make i2iFunding make a unique platform:
- i2iFunding maintains a principal protection reserve which safeguards you from the risk of loss on the outstanding principal amount, depending on the risk grade. So far, i2iFunding has managed to maintain the very low default ratio.
- It approves loans only after assessing them on over 50 predetermined parameters.
- Based on the risk profile of the borrower i2iFunding classifies each approved loan project in one of the six risk grades—starting from “A” to “F” wherein, “A” denotes the highest safety.
- Unlike other P2P Platforms, i2iFunding doesn’t allow investors to negotiate the interest rates with borrowers. It follows the principal of “one-risk grade-one-interest”.
If you have any specific queries about lending at i2iFunding, you can reach us at firstname.lastname@example.org