Fixed income securities are one of the most popular investment options available to the investor in India. Fixed income securities are considered to be better investment options due to lower volatility and higher returns. P2P lending India is a recent phenomenon that is providing tough competition to existing investment options including fixed income instruments in terms of risk and return. Let us look at comparison between peer to peer lending and fixed income instruments –
1. Interest Rate Return – With increasing market rates prices of fixed income securities would fall and when interest rates are falling, prices of fixed income securities would rise. Interest rates fluctuations would not have any impact on P2P lending returns. An investment in peer to peer lending would give the same amount of return to the investor as agreed initially during agreement form.
2. Liquidity – Liquidity is one of the most important risks associated with fixed income securities. If there are very few buyers and sellers available in the market for a security then you might not be able to sell your bond on maturity. Whereas, P2P lending is not impacted by the liquidity in the market.
3. Inflation – With ever increasing inflation in the current economy, there is always a chance that rate of return that you get from your fixed income securities is not able to compete with inflation. For ex – if returns from a corporate bond are 8% paid annually and inflation is running at a rate of 9% then, your return from the fixed income security is not able to beat inflation for you. Whereas, returns from P2P lending India usually greater than inflation.
4. Duration – Duration is the amount of time to be invested in fixed income securities to get the desired return. Usually, you need to invest in corporate bonds for the duration of at least 10 to 15 years. Whereas, in peer to peer lending, you need to invest for 3-5 years to generate returns that can beat returns generated from fixed income instruments.
5. Diversification – P2P lending platform allow you diversify your investment portfolio. For ex – you can invest in borrowers of different risk profile that would provide you different rate of returns that can range from 12% to 18% post tax returns.
6. Returns – P2P lending platform can offer you a post-tax return of around 12% to 18% per annum but a yield from a bond is usually in single digit figure. Fixed deposit rates are usually in the range of 7% to 9% per annum and moreover, you need to invest for a longer tenure of duration in fixed deposits to generate those returns.
As we can see from above article that investing in P2P lending India generates better returns compared to fixed income investments. There are various types of risks associated with fixed income investments like inflation risk, interest rate risk and liquidity risk which are not associated with peer to peer lending investments.