What is an alternative investment?
An alternative investment is a financial asset that does not fall into one of the conventional investment categories i.e. stocks, bonds, bank deposits etc.
Some examples of alternative investment asset classes include Real estate, Private Equity, hedge funds, art and antiques, commodities, etc.
Most of the above investment opportunities are available only to the High Net-worth Individuals (aka HNIs), as the initial investment required is quite large. Retail investors like us do not have such large surplus funds to set aside for investing in these alternative investment asset class.
Moreover, the risk appetite for HNIs and other retail investors is remarkably different. HNIs generally have several sources of income, that they can then set aside for investment. For retail investors like us, having a limited (usually only one) source of income makes us wary to accept the higher risk that such alternative investments demand. Hence, we usually miss out on the attractive returns offered by them.
Alternative vs. Conventional Investing
Three major differences between alternative investments and conventional are:
- Liquidity of funds
- Risk Diversification
- Minimum Investment Amount
Alternative investments generally have restricted liquidity, less diversification (high risk) and larger minimum investment requirements. All these make alternative investments relatively inaccessible for retail investors.
P2P – A golden alternative
P2P lending is one of the few alternative investment opportunities, which appeal to the retail investor & HNIs alike.
What is P2P lending?
If you missed my previous article on the basics of P2P lending, you can read it here. Let us visit the above points w.r.t. P2P lending
Liquidity & Returns
Retail investors may require higher liquidity, due to the limited investible surplus available with them. P2P lending lets them enjoy liquidity while offering good return on their investment.
There are 2 ways in which intermittent liquidity can be gained
- Withdrawing money on a regular basis as and when the EMIs come in, or
- Withdrawing fixed amounts at regular intervals (quarterly, semi-annually etc.)
HNIs may have more investible surplus and thus, may not need to withdraw previously invested funds on a regular basis – they can keep
re-investing money received through EMIs giving them the benefit of compounding, resulting in better returns over a longer horizon.
Risk Diversification
Per RBI norms, a lender’s exposure to a single borrower cannot exceed INR 50,000 (Rupees Fifty Thousand) across all P2P platforms. This reinforces the principle of diversification.
P2P platforms allow lenders to loan amounts as little as INR 500 (Rupees Five Hundred). An investor lending INR 50,000 can lend to multiple borrowers, thereby diversifying risk.
HNIs usually invest bigger sums, and hence can deploy amounts in larger tiers e.g. INR 1,000 or in multiples thereof. This also makes it easier for them to keep track of repayments from borrowers.
Minimum Investment
RBI has recently increased the limit on P2P investments from INR 1 Million to INR 5 Million across platforms. This has made P2P more attractive to HNI investors, as it allows them to allocate a meaningful portion of their investible surplus to this asset class. Further, as there is no minimum investment requirement for P2P lending, this makes it very accessible for retail investors as well.
In conclusion, P2P lending is a great investment opportunity regardless of the investor category i.e. Retail or HNI’s. It offers an incredible investing avenue to all type of investors seeking attractive returns within a reasonable risk spectrum.
If you are interested to learn more about P2P lending or other investment opportunities, please fill in your information here and we will get in touch with you.