P2P Lending Vs Stock Markets: The ideal Investment for you

Investment

Raghavendra Pratap Singh

Investment in Financial Assets has been increasing in India. High return assets such as stocks and Peer to Peer (P2P) lending are increasingly sought after by investors.

It depends on the knowledge and risk profile of the person. While P2P lending is simple, stocks are pretty complex and require a lot of knowledge. However, both have the potential to provide good returns.

Indian households tend to have the highest savings in the world – at about 30 percent of income. Surprisingly, this does not translate into investments in the same proportion. Only about 3.2 crore people invest in the country’s stock markets – that is less than 3 percent of the population.

An interesting question then, is whether they should try their hands in the stock markets, or dip into P2P lending? The first is an old school investment technique; the other is a rapidly emerging debt financing model taking India by storm. It is simple to comprehend and provides easy diversification. In comparison, stocks are not for everyone and repeatedly people like us have burnt their fingers. Let’s analyse both.

P2P Lending

P2P lending platforms connect borrowers with individual lenders, who come together to crowdfund the borrowers’ loan requirements. While borrowers get loan at attractive interest rates, these rates are also great for lenders as these are higher than anything else available in the market. P2P lending platforms will make available all interest to lenders and charge nominal service fee. They allow lenders to have a highly diversified portfolio that mitigates the risks associated with loan defaults.

India continues to see rapid growth in the P2P lending industry. With the industry now being regulated by the RBI, there is strong tailwind for the sector. Added advantage is the platforms are online and hence, provide strong data trail leading to high levels of transparency.

The advantage of P2P lending is that it is simple to comprehend and easy to invest. Investment can be done with a simple click of mouse with amount as low as Rs 5,000. Leading platforms also provide deep analysis of borrower’s profiles which helps in easy decision making. Investors stand to earn multiple times the returns they would receive from bank deposits, fixed deposits, or other investment options.

However, as a downside, P2P loans involve unsecured loans; there is some level of risk to your capital as compared to something like a fixed deposit or a PPF – which comes with a sovereign guarantee. But as we mentioned earlier, diversification significantly reduces the net risk one may be exposed to.

For example, if one has diversified portfolio, the portfolio will follow the industry default of 2-4 percent, helping him/her to make 18 – 25 percent returns. However, if he/she invests in concentrated portfolio if 4-5 loans, any default will have significant impact. Hence, idea is to invest small amounts.

Stock Investments

Investment in stock market on the other hand is best for the gurus. Most of “us” have dabbled in the stock market based on inputs from our friends only to have burnt our fingers. This investment method is more akin to gamble. To the uninitiated people like us, it is almost impossible to find such investments.

On the other hand, knowledgeable investors mitigate such risks through deep study before investing and end up making block buster returns. So, what if you don’t have those skills? It is better to invest in multiple financial assets and avoid investing in stocks directly.

While stocks are fairly easy to buy and equally easy to sell, a large amount of brokers and institutions exist for investors to choose from, and the industry’s evolution has made it convenient for user to give it a shot. One can also exit one’s investments at a short notice, which is impossible in case of PPF/ fixed deposit.

However, the downside to it is stock market is always volatile. This means that one can lose significant portion of investment and incur losses due to no fault. Stock market is not everyone’s cup of tea, as it requires huge amounts of time and energy to get one’s portfolio right. The volatility can be a cause of stress, and many choose to avoid the stock market for this reason. Another point to be noted is that the shareholders are paid at last if the company goes broke. Despite getting ‘ownership’ in a company when you buy its stock, you’re not guaranteed a proportional share of its profits.

Which one will you pick?

Having said this, what investment option you pick is ultimately dependent on the kind of investor you are. If you are willing to invest a solid amount of time and research into your portfolio, and have the ability to pinpoint trends in the stock market, the stock market is for you. You may well make very healthy returns.

However, if you’d rather make handsome returns of 18 – 25 percent which can be higher than stock market, (remember, only market gurus such as Warren Buffet have been able to provide 20 percent-plus returns over long period) and without the associated volatility, P2P lending can be a good option. It allows one to pick borrowers at a quick glance, outsources the security and recovery mechanism to one’s P2P lending portal, and ensures returns as high as 30 percent.

Whatever you do, it’s fairly obvious leaving your money in the bank is a bad idea!

[“Source-moneycontrol”]

Written by Loknath Das