P2P Lending as an asset class: Should you cherish it?

When it comes to investment, asset allocation plays a major role wherein your investments are allocated to various asset classes depending upon your investment horizon and risk appetite. Peer to Peer (P2P) lending is based on an online structure wherein it connects the lenders and borrowers without any intervention from banks. RBI (Reserve Bank of India) on September 2017 had issued a notification wherein it passed a mandate for all the P2P lending platforms to get registered as NBFCs (Non-Banking Financial Companies) and gave them a set of guidelines. The Indian P2P lending market is expected to be about 5 billion dollars by 2023.

P2P lending as an asset class would allow you to further diversify your investment portfolio. In fact, this asset class in not market linked implying market corrections doesn’t affect the returns of P2P lending. This is more sort of linked to economy. If there is a fall in consumer demand, then it will negatively affect the returns of P2P lending. Having said this, P2P lending as an asset class has a potential to give reasonable returns.

However, you need to create an optimum P2P lending portfolio wherein you should lend based upon your risk profile. Many platforms do give you a lot of information about the borrower to take an informed decision. For example, if the borrower pays regularly without fail then the rate of interest would be less and similarly if the risk of default is more, then the interest rate will be high. You should diversify across borrowers to get optimum returns.

So, should you include P2P lending as an asset class in your portfolio? Yes, however keep P2P lending for wealth creation and not for financial goals. Specifically, don’t allocate it to financial goals such as child’s education, retirement, child’s marriage, etc. that comes under needs.