How to double your money in just over 4 years?
How to double your money in just over 4 years?
Let’s look at the obvious options.
No. At the current 8.1% rate of interest, it would take 8 to 9 years.
No, again. At the current 8.1% rate of interest, it would take 8 to 9 years.
No. It would take 10 years at the current rate of interest of 7%.
Corporate Deposits or Non Convertible Debentures?
Even if it offers a 12% return, it would take 6 years at minimum.
You wouldn’t bet on it anymore. And who has that kind of money to spare?
Stocks and Mutual Funds?
May be. But how does one digest the the volatility and uncertainty?
(Scratches head. What are you talking about?)
Well,we are talking about Peer to Peer lending.
Here’s the deal.
If you were to invest Rs. 1 Lakh in Peer to Peer loans today, your investment would be close to double to Rs. 1.97 Lakhs in just 4 years.
Have a look at the table below.
(* Calculation shown in above table is done on the basis of assumption that, investor will reinvest the EMI amount in p2p loans every month)
The above table pertains to peer to peer loans on i2ifunding.com. As you can see, if you made an original investment of Rs. 1,00,000 then in just 4 years, the value of your investment would be Rs. 2.35 Lakhs in case of no defaults. Even if you allow for 5% default per year in your portfolio, value of your investment will still become Rs. 1.97 Lakhs.
But how do you make it work?
Will you be taking too much risk?
Will your investment be safe?
Is the return guaranteed?
Let’s answer these questions starting with the risk part first.
A peer to peer lending platform is a place where interested borrowers sign up and list their requirement for loans. On the other hand, investors who are willing to lend money also sign up to find borrowers who they can lend to and earn a fixed rate of return.
P2P platforms typically do a thorough assessment of the borrower on several parameters to determine their credit worthiness as well as the risk category that they should belong to.
i2i access borrowers using its proprietary credit score model on 40+ parameters to determine the risk category & corresponding interest rate.
i2ifunding.com has created 6 risk categories in which it places its borrowers – Starting from A – the most credit worthy, it goes on to F – the least credit worthy.
The borrower in Category A is the most credit worthy, someone who would make timely repayments and would never default. For this profile, she would also command a lower interest rate.
Category B would have good creditworthiness but not equal to Category A. This person would be willing to pay a slightly higher rate of interest than Category A.
And so on and so forth.
You decide to invest Rs. 10,000 in each of the Category A & B and Rs. 20,000 each in other 4 categories – C to F. You give loans to multiple borrowers in these categories based on their needs. This is smart diversification, where you are using different risk profiles to increase your overall returns. So, in 6 categories you will invest Rs. 1,00,000 overall.
We will assume that you will typically lend for a year and accordingly the EMI will be calculated. The interest rate once locked in is fixed for each borrower. Based on current trends, it is at 14% for the highly credit worthy borrower and 27% for the not so credit worthy borrower. Refer the above table for all the interest rates.
Once the loan is finalized, you will receive the monthly repayments into your account. Yet again, being a smart investor who understands the power of compounding, you will reinvest those repayments into new loans. This keeps your money working at all times.
Your investment in each of the categories compound by various degrees. Overall, in about 4 years, you are more than doubling your money if there is no default. Even if you allow for 5% per year default in your portfolio, your investment almost doubles. The original investment of Rs. 1 Lakh will turn into Rs. 1.97 Lakhs.
Now, tell us, which other investment option can offer you a fixed rate of return with the power of compounding on an ongoing basis to double your money in the minimum time period?
What about default?
Let’s be real and acknowledge that there are chances that some borrowers may not be able to repay, in part or full. But you need not worry.
Even in the calculations above, a 5% default rate has been factored in. So, yes you are almost doubling your money even if 5% of your investments would be defaulted by borrowers.
Pro Tip: Use the Rule of 72 to know at what rate of interest or in what time can you double your money. If you know the interest rate, then divide 72 by that number and you will know how much time will it take to double the money. If you know the time period, then divide 72 by that number and you will know the rate of return you need to double your money.
So, what is the rate of return you need to double money in 4 years?
Key Lessons to minimize risk and maximize returns on the p2p platform
- Diversify your investments across categories to benefit from higher returns.
- Divide your overall investment and lend to multiple borrowers even within the same category so as to minimize any default.
- Reinvest your payments regularly so as to benefit from the power of compounding. Don’t let the money be idle.
So, ready to double your money?