Minimum Risk, Maximum Returns
P2P lending investment – Minimum Risk, Maximum Returns
Here is a simple question for you.
From the following 3 investment choices, which one would you select?
- Minimum Risk, Minimum Return
- Maximum Risk, Maximum Return
- Minimum Risk, Maximum Return
Your preference is obvious, option no. 3 – Minimum Risk, Maximum Return. Right?
Why is that the case?
To understand that let us first understand risk.
The idea of risk is simple. It is the chance that the expected outcome will not happen.
For example, if you lent Rs. 100, at 8% rate of interest for 1 year, you expect that at the end of 1 year, you would receive the principal of Rs. 100 back as also Rs. 8 as the interest.
Now, if you were to be told that the person you have lent the money to is not in sound financial position. Hence, there is only an 80% chance that he would return the principal or loan amount to you.
Here, the 20% chance of your money not coming back to you is the risk.
The question now is how do you make risk work for you and get higher returns?
Let’s consider the original 3 choices that were offered to you:
Investment option 1: Minimum Risk, Minimum Return
This one is a no-brainer. A Bank FD is an example of such an investment where your principal and the interest on it is almost guaranteed. The risk is close to zero in this case.
If you are looking for absolute safety, Bank FD, PPF, Post Office Deposits, etc are the investment options you would prefer.
The question is would you be satisfied with this return?
Let’s move to the next option.
Investment option 2: Maximum Risk, Maximum Return
In this option, the investment is exposed to the maximum risk in a bid to achieve the maximum gains. The chances that you will lose your money are very close to 100%.
Ponzi schemes (heard of Bernie Madoff?), hedge funds, complex structured financial products, venture capital, even some stock market investments represent this investment option. These scheme usually promise returns of 10x, 20x or 100x in a very short period of time. (x means times multiple).
It is highly unlikely you would deliberately put money into something like this. However, sometimes greed overpowers us and we pass away our hard earned money to such schemes. There are enough cases out there. However, as a general rule you should avoid them.
So, this one is also ruled out. Let’s move to our final option.
Investment option 3: Minimum Risk, Maximum Return
That’s what any smart investor would do. Earn the maximum return for a minimum reasonable level of risk.
This brings us back to our theory of risk and return. When you take some risk with your money, you would want to be compensated with higher returns for taking that risk.
In an earlier example, you lent your money to someone who had a 80% chance of returning it. In that case, an 8% return would not be sufficient. You are taking risk here. An 8% return is more suitable for a safe Bank FD.
While there is a whole lot of science to determine how much return should be expected for risk that you take, we will keep it a little simple here.
For an investment with a minimum reasonable level of risk, an expected return would be around 15% per year.
Equity investing too falls under this category. However, it could take years for you to realise the return for the risk you have taken in equities.
A relatively safer option is that of Corporate Deposits. They would offer to you fixed interest of around 11% per annum.
Another unique option that you should consider is that of peer to peer lending such as that offered by i2ifunding.com. It enables you to earn an average 16% rate of interest per year on the money you lend through its platform.
And yes, unlike equity, you do not have to wait for years to receive this return. It comes to you on a monthly basis.
It is one of the best ways to make an ideal investment with Minimum risk, Maximum return.