April 25, 2018
Thinking on starting your investment journey? Or looking for option that provide better returns? Here is a tip guide on Peer-To-Peer Investing or P2P Funding best practices. Be warned though, investing in P2P can get addicting because it can be quite fun analysing notes to make a greater return on your money.
Peer-to-Peer Funding, also commonly known as P2P Lending, usually refers to an online service that handles all of the logistics for both borrowers and lenders. In addition to providing agreements, payment processing, and borrower evaluation, P2P funding is an easy marketplace for individuals and organizations to connect.
In Malaysia, the Securities Commission (SC) is the regulatory body for P2P funding activities via its P2P regulatory framework and there are a few platforms where you could invest your funds in. Working with each P2P funding platform is different but we like Fundaztic. They allow you to start investing with just RM50 and even an easy to understand video instructions to register.
See also: How To Make More Money With P2P
If you’re just getting started with P2P financing as an investment tool, take it slow. This is where you need to understand your risk appetite, the risk grades of the businesses that are asking for money and find one that you’re comfortable putting money towards. Manage your expectations. Although it’s tempting to go for higher-risk businesses, because of the higher interest rates and thus higher returns, you need to ask yourself what you can stand to lose if they default on their payments. Fundaztic has a great risk profiling questionnaire that can give you a head start.
Study the business plan of the issuer. It is very important to know the risk associated with the borrower. While Fundaztic does perform a credit evaluation process with a Probability of Default rate, you should always read the profile and evaluate for yourself if the information is something you believe in.
Diversification is an important point when investing in P2P funding. You should diversify your investment by spreading it across multiple investment notes, with different risk grades, interests and tenure. This way, you minimise the risk of defaults and protect your investments. When you spread your money this way, your profits are likely to be higher than your defaults. And while it sounds more time consuming than it actually is, Fundaztic does offer an auto-invest feature which automatically invest into the investment notes based on the investor’s investment criteria. Furthermore, with a minimum investment of just RM50, anyone can practise diversification through Fundaztic.
As you get your principal and interest repayments monthly, don’t just cash out your P2P returns the moment you’re able. Make the most of capital gains by continually reinvesting your returns into new investment notes. This way, your money is always working hard for you. Without reinvestment, your repayments are simply earning zero return. Through continuous diversification and reinvestment, you can earn as much as 23% in effective interest rates.
Before you become a P2P investor, make sure that you can cover your financial commitments and you have a strong emergency fund for those rainy days. You won’t able to withdraw money from the P2P platform at a whim. And while the total amount of money to invest into P2P financing depends on your financial situation, you should always remember, P2P investing has somewhat of a learning curve. It is easy to get excited and carried away early on. We suggest to start with a small amount, gain some experiences and decide whether it is for you and then increase your deposits over time.
Investing with P2P funding is a fairly straightforward process, but you need to take reasonable precautions like the ones outlined above. Follow these tips, keep learning everything you can, and never take on more risk than you know you can handle.