Why lending as an asset class is good investment

For the majority of Indians, when it came to investments, the most popular choice is either real estate or gold. For the financially savvy ones, investing in stocks and mutual funds also figured prominently in investing choices.

Lately, however, there has been a problem. Real estate in India is facing a very uncertain future and a recent Economic Times article states that unsold housing stock across top eight property markets in the country rose 18 per cent to over 1.1 billion sq ft as of June 30. Barring Hyderabad, all other cities have shown a rise in the unsold inventory, with Bengaluru showing maximum increase of 55 per cent compared to a year ago. The National Capital Region tops the chart with 326 million sq ft, followed by Mumbai Metropolitan Region at 201 million sq ft. Such is the case that most observers of the sector see a crash in real estate prices. On the other hand it is difficult to get a pulse of gold and where it is headed. From the historic highs of 2011-12, gold prices have lost their sheen and have been very volatile in their value. Gold pricing is highly opaque and while it is a popular form of investment for Indians, it is only linked to the sentiment and the prevailing mood in the economy and hence devoid of any real value.

In such a scenario alternative means of investing like peer-to-peer lending can be a good option. You may be a risk-taker or someone who wants to play it relatively safe, lending as an investment can suit almost every type of investor.

P2P lending has been around for about half a decade globally, but in India it is still relatively new. Many argue that while P2P lending is lucrative, it will never provide spectacular returns on investment. So, what sorts of returns can you earn? Returns on our site range on an average 22 % with the lowest-risk investments giving returns 14 % and high risk loans yielding 30%. Across the world there has never been a negative year of returns in P2P lending and there is very little chance that you will suffer catastrophic losses.

So how does that happen? The prime reason is that a good lending site will reject 90% of the loan applications to ensure that only the ones with considerably good credit and repaying history make it to the site.

In a P2P loan the lender is in complete control of what he or she gets into and has the option to ask questions to clarify doubts. This also means you are on your own and there is a certain degree of learning curve involved. P2P can be a great way to understand what works in the world of finance and how things move. The initial lending amounts can be low to test your hypothesis and increase as you figure out how things move.

What works for P2P is that it is relatively easy to understand and online platforms have ensured automated processes makes life easier. The entire due diligence process, finding out the credit history of the borrower, his risk profile and documentation are handled by a platform, which means an investor has to merely decide which borrower suits his risk appetite. Unlike other investment avenues, P2P lending has very few barriers to entry and anyone with a minimum income of Rs. 10 lakh per annum can become a lender. P2P lending's stability as an asset class is comparable to the best in the asset class and with lending becoming mainstream; more and more Indians recognize its potential.

Lending ensures a steady, sure-shot rate of return, but the flip side being you will stay invested till the tenure of the loan. There is no pulling out before the loan term ends and I always tell my investors to look at it as an investment for about five years. As an investor, you may choose to invest in shares, bonds, real estate, gold among others, but P2P gives you the chance to diversify into an alternative asset class. For the longest time the lending business was the turf for banks and there is little or no doubt on how lucrative it has proved to be over the last century. Albeit at ridiculously high interest rates, ask any money lender and he would tell you how profitable the lending business is. People are realizing that smart investing also includes lending and the growing popularity of P2P in the country is a testament to that.

(The writer is Founder, CEO of peer to peer lending marketplace, Faircent.com)

Source : ET wealth