One of the largest risks in investing in a P2P lending platform like Funding Societies is the risk of a loan defaulting. Portfolio diversification by the means of investing into a good mix of deals on the platform could help investors to minimise this risk. For business term loans, a default is defined as a loan that has been unpaid for over 90 days. For invoice financing, a default is defined as a loan that has been unpaid for over 60 days. To manage the default risk, investors should consider diversifying their portfolios.
What is diversification?
In investing, diversification refers to investing in multiple assets to reduce the risk of the overall portfolio. In the context of Peer-to-Peer investments, diversification refers to investing in multiple loan products.
Don’t put all your eggs in one basketWarren Buffett
Invest in each and every loan
Diversifying your investments across multiple notes & industries is one way to mitigate concentration and default risks and optimize your portfolio returns in the long run. By investing into each and every opportunity offered, your risk might be reduced. In the case where a deal were to default, the principal amount lost would not impact the entire portfolio heavily.
How does diversification work?
Taking the above scenario as an example, we see that Andy invested S$800 into a single deal and this single investment makes up 50% of his overall portfolio. Whereas in the other scenario, Emma invested S$50 uniformly across 100 deals. In Emma’s scenario, we can see that a single investment makes up only 1% of her overall portfolio.
In the event that Deal A defaults, Emma’s potential loss will only be 1% of her overall portfolio whereas Andy might face a potential loss of half of his overall portfolio.
How can Diversification help to minimise risks?
Different investors have different investment strategies. Some investors prefer to invest the minimum amount possible into each and every single deal. Even if one deal were to default, the principal amount lost would not impact the entire portfolio heavily. This way, a more consistent return is possible due to lower concentration risk. Whereas other investors prefer to pick & choose specific deals and invest varying amounts according to their risk appetite in order to leverage on the higher yields.
How to use Auto Invest as part of your diversification strategy
Auto Invest is a feature that allows you to customise & automate funds deployment based on your investment preferences. As an investor, you can consider setting up the Auto Invest bots by selecting various parameters such as investment products, interest rates range, tenors and investment amount range. With the use of the Auto Invest feature, an investor will be able to customise a specific amount to be invested across multiple deals.
Visit our Help Center here for more information on diversification to mitigate investment concentration.
Disclaimer: The information above is meant purely for informational purposes and should not be relied upon as financial advice. Users may wish to approach a financial advisor before relying on any advice provided by the website to make any decision to buy, sell or hold any investment product.
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