resr 5paisa Research Team 14th December 2022

Should you value peer-to-peer lending as an asset class?

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Today's market offers a wide range of asset classes. Now, peer-to-peer lending has joined the ranks. So, should you consider investing through peer-to-peer lending? Let us investigate.  

When it comes to investing, asset allocation is crucial since your funds are assigned to various asset classes based on your investment horizon and risk tolerance. Peer to Peer (P2P) lending is based on an online system that links lenders and borrowers without the involvement of banks. 

The Reserve Bank of India (RBI) issued a notification in September 2017 mandating all P2P lending platforms to register as NBFCs (Non-Banking Financial Companies) and providing them with a set of criteria. By 2023, the Indian P2P lending sector is anticipated to be worth over USD 5 billion. 

P2P lending as an asset class would allow you to diversify your financial portfolio even more. In truth, this asset class is not related to the market. This indicates that market corrections do not affect P2P lending returns.  

This is more economic in nature. If consumer demand falls, it will have a detrimental impact on the returns on P2P lending. According to this, P2P lending as an asset class has the potential to provide respectable returns. 

However, you must design an optimal P2P lending portfolio in which you should lend based on your risk profile. Many platforms provide you with a wealth of information on the borrower, allowing you to make an informed decision.  

If the borrower pays on time and without fail, the interest rate will be lower; nevertheless, if the chance of failure is higher, the interest rate will be higher. To maximise your earnings, you should diversify between borrowers. 

 So, should you incorporate peer-to-peer lending in your portfolio? P2P lending should be used for generating wealth rather than other financial goals in this case. Don't devote money specifically to your needs, such as your child's education, retirement, child's marriage, and so on. 

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