Many investors may find Peer-to-Peer (P2P) investments attractive due to the benefits it provides such as higher interest rate returns and shorter tenors. However, first-time investors may find the process daunting especially if they are not yet familiar with the details of P2P investing. We have compiled a list of 5 things you should look out for when investing with P2P platforms to help you avoid common mistakes made by first-time investors.
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Investing only in loans with high returns
Investors may often be incentivised to fund P2P investments due to the high-interest rate returns they provide. To receive greater returns, these investors may end up only picking loans with higher interest rates. However, interest rates should not be the only determining factor for investing in a loan. High-interest rates are an indication of higher risk and you would be better off starting with a more conservative approach and gradually increasing your high-risk investments as you see some success in them and become more familiar with this investment asset.
Not diversifying your investments
Expanding on the previous point, taking on a balanced mix of high and low-risk investments is a way to diversify your investments. In any type of investments, it’s crucial to diversify your portfolio so that you won’t end up putting all your eggs in one basket; this may help you minimise your risk.
There are different degrees of diversification; Firstly, you can diversify across different types of investment assets such as investing in a mix of stocks, bonds, P2P investments, etc. Secondly, with regards to P2P investments, you can split your investments across different borrowers as well as invest in a mix of investments as above mentioned.
Read more: How Diversification Can Help to Reduce Risks in P2P Lending
Lack of long-term planning
It is important to look beyond short-term returns when investing in P2P investments. Firstly, avoid investing money that you may need in the short-term. You can do a projection to identify any future financial needs before deciding your investment amount. Secondly, it would be wise to be mentally prepared of possible delayed repayments as well as aware of the default/delayed rates of the P2P platform you are investing with. At Funding Societies, borrowers will be given a 7-days grace period. Thereafter, you will receive a late interest payment as well as updates on the process of negotiations that Funding Societies will initiate with the borrower. You can find out more on Funding Societies’ approach to handling defaults.
Withdrawing returns when you receive them
It may be tempting to withdraw your returns once you receive them. However, experienced P2P investors will often leave their returns as part of their available balance for a longer period of time to potentially benefit from the compounding effects from reinvestments. You can read more here on how the compounding effect of interest can help you maximise your P2P investments. To break it down, reinvestments may potentially increase your overall interest rate returns and can happen in 2 ways. Firstly, for short loans such as invoice financing, you may receive a one-time interest pay-off and return of principal at the end of the loan. You can reinvest this amount to potentially receive a slightly higher compounded interest. Secondly, for longer-termed loans that payout a monthly interest, such as business term loans, you can reinvest both the monthly interest and principal payouts to create a compounding effect that may potentially generate higher overall interest rates.
Unfamiliarity with P2P platforms
Before venturing into any investment tools, it is important to equip yourself with sufficient knowledge of the platforms that you are investing with, the P2P market and common terminologies used. Proper research on the P2P platform that you are planning to invest with will help you avoid unnecessary risk with your investments. A good platform to consider is Funding Societies, the biggest P2P lending platform in Southeast Asia that is regulated by the Monetary Authority of Singapore (MAS).
It will also be useful to better understand the features of P2P investments such as its simple/effective interest rates, repayment schedule, etc. At Funding Societies, a loan factsheet will be provided on every investment opportunity. It contains details of the loan, its repayment schedule, a summary of the company and director’s backgrounds, the company’s risk snapshot, etc. You can find out more on the loan factsheet here to make an informed decision for your investments.
Lastly, gaining an understanding of the P2P macro-landscape may also aid you in your decisions. You can access our overview of the P2P landscape in Singapore here.
P2P loans are a form of alternative investments that hold many benefits, especially for new investors that would like to start small or with experienced investors looking to diversify their portfolio. By watching out for these 4 listed things that you should not do when investing on P2P platforms, we hope that you’ll be able to minimise unnecessary risks and have a successful P2P investment journey!
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