5 Ways to Stay Safe When Investing in P2P Platforms

From Robust Tech House on Orca Money:

“Peer to peer lending (“P2P lending”) has emerged in recent years as an innovative form of financing. P2P lending gives retail investors the chance to earn greater returns on their investment compared to deposits in financial institutions and provides borrowers with lower interest rates. The P2P industry is filling the gap un-served by mainstream financial institutions. However, P2P investment also comes with significant risks. Investors, therefore, need to understand what P2P lending is and take precautionary measures.”

  1. Diversify your investment

Contrary to Warren Buffet’s views on diversification, a guiding principle for safe investing is to diversify: Do not put all your eggs in the same basket. Unlike individual stocks which Warren Buffet was referring to, many P2P platforms are so popular that all available allocations for investors are snapped up within the day. This suggests that investors are not able to do proper due diligence before lending and therefore, it is important to diversify your investments.

  1. Start Small on Each Platform

P2P platforms differ in many ways, from interest rates, to information provision all the way to investors APR. Since most platforms in Singapore allow minimum investments of S$1000, starting with a small amount and getting comfortable with individual platforms allow investors to decide which platforms best suit their investment needs.

  1. Start with lower risk options

A general rule of thumb: The higher the interest rates, the higher the risk. New investors should start with low interest rate facilities, until they become more acclimatised to the investment types and their comfortable risk to reward ratio. Using personal judgement and decision making to place investment decisions in a limited time frame requires practice and experience.

  1. Develop your personal red flags

Personal red flags will be key in decision making, these can include metrics such as industry of the borrower, cash flow records of the borrower, working capital strength, ability to make profits etc. These measures can allow the investor to make a quick and relatively safe investment decision.

  1. Understand the motivations of the P2P platform

Investors should choose P2P platforms that align with their interests. P2P platforms differ in their structure and revenue recognition model, some receive revenue when investments are made, while others accrue their revenue when loans are repaid. P2P platforms which want to maintain a positive track record will take meticulous and shrewd steps to pursue bad loans and restructure loan payment profiles.

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Growing appetite for private credit amongst HNWIs and family offices

From Ben Rossi on What Investment:

“Faced with volatility and uncertainty in public markets, investors have increasingly turned to alternative asset classes for uncorrelated returns and, particularly, income. There is growing appetite for private credit among high net worth individuals (HNWIs) and family offices (FOs), with some investors now committing some 11% of their investable funds to this asset class. With interest rates remaining at an unprecedented low and equity markets continuing to fluctuate, we anticipate that this trend is set to remain.

The growing popularity of private credit via a range of funding instruments including specialist investment trusts, funds, Peer2Peer platforms (P2P) and secured loan notes, lies primarily in the strength of the risk-adjusted return. As an alternative asset class not only does it offer diversification and steady cash flows, it is also uncorrelated to the stock markets whilst generating a significantly higher yield than the traditional fixed-income markets. Whereas annual yields on publically traded corporate bonds currently generate yields of two to five percent, typical interest rates for private credit transactions can easily double this. ”

P2P lending as a investment product offers not only high returns to the investors, but also diversification benefits when allocated to a balanced investment portfolio. With the emergence of more HNWIs and family offices as a macro trend, P2P lending volume is expected to experience exponential growth and remain one of the most attractive alternative asset classes.

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