How to build diversified portfolio through Peer to Peer lending?

by varun · Published October 5, 2020 · Updated February 8, 2021

Peer to peer lending platforms are one of the newest and most return oriented investment available to investors in India. There are limited asset classes available for investment for investors in India. Those limited options would include stocks, debt instruments, options, gold, real estate etc. In current scenario peer to peer lending platforms is one of the most viable investment options for a serious investor seeking higher ROI compared to those options. Let us see how you can diversify your peer to peer lending portfolio –

Diversify across risk ratings – These peer to peer lending platforms categorizes borrowers into different risk categories like high risk, medium risk and low risk etc. These categories take into account previous default rates observed in similar customers. A low risk customer has only 1% default rate in the past while high risk customers have 3% to 5% default rates associated with them. To build a diversified portfolio you need to mix and match across different categories. For ex- if you are seeking a higher return then you can build your portfolio by investing in the ratio of 5:3:2 across high risk, medium risk and low risk customers. For different strategy, you can adopt different ratio across customers.
Diversify across profession – If you want to diversify your portfolio across a different category then you can choose to diversify profession of the applicant. For ex- Historically, it has been observed that in smaller ticker size of loan salaried class have a lower default rates compared to self employed class. Similarly, if you are looking for a portfolio with lower risk and lower return then you should put your investments in the ratio of 8:2 for salaried and self employed applicants.
Diversify across loan amount – You can diversify your portfolio by investing In different loan amounts varying from different size. By investing in different loan amount across different risk profile, you are spreading your risk across different consumers.
Diversification across platforms – Different peer to peer lending platforms have different lending philosophy which is quite different from each other. Moreover, different lending platforms have different default rates for each of them. By diversifying across peer to peer lending platform, you are minimizing your risk of defaulting in one peer to peer lending in case of some unforeseeable circumstances.
Other factors – You can also diversify your portfolio by doing exhaustive research from your side on each and every applicant. You should clearly look into details like banking details, financial details and previous repayment track record of each and every customer. You can also mix and match different customers by mixing these customers on these variables too.

Main objective of diversification in peer to peer lending investing is to earn higher ROI compared to existing investment options available to the investors. With current experience in peer to peer lending investments it would be beneficial for customer to diversify along above categories to earn higher ROI that beats inflation in longer term.

In this article, we have discussed importance of peer to peer lending in portfolio diversification. Meanwhile you can read more articles on various business and business related licenses here.