5paisa Loans Blog

P2P Lending and Stock Market Investments

By Anurag Srivastva | 25 Mar 2020

One thing is quite clear that lenders need to look at P2P lending as an investment product. P2P lending can generate returns of 20-25% on an average although the risk is certainly higher. However, where P2P lending scores is that it is transparent, technology driven and provides a platform where lending is based on hard credit facts of the borrower.

How does P2P lending compare with stock markets?

If you look at the best investment options, equity is certainly a proven method to create long term wealth. Equity mutual fund returns have given CAGR returns of 14-15% on an annualised basis. Of course, even if you look at the Sensex over the last 40 years, it has given annualised returns in the region of 17%. How does P2P lending compare?

We do not have a 40 year legacy or even a 10 year legacy for P2P to make an adequate comparison. However, the returns in the last couple of years have been in the range of 20-25%. Even if you make a provision for bad loans, you are still talking of attractive returns. Will these returns sustain into the future; is hard to say. As an asset class, P2P lending does bear some similarities to equity market investing. Of course, the challenge is still to find the best p2p lending company; but that is a different story.

How P2P lending compares with stock market investment?

While equity has a much longer legacy compared to P2P lending, you need to admit that P2P lending has the potential to become an important alternative asset class. Here is why it offers an interesting option.

• Returns on P2P lending can be, on an average, much higher than other debt classes. In fact, its returns could be closer to equity, considering the risk perception. In the last two years, the average returns on P2P lending have ranged between 20% and 25%.
• Like in the case of equities, P2P lending is an automatic compounder of money. Once you allocate a certain corpus to P2P lending, then it automatically gets rolled over each time the old loan is repaid. Of course, you need to keep rational expectations and avoid the outliers among the borrowers.
• The success of P2P lending largely predicates on the smart use of technology and sound credit assessment. That can go a long way in ensuring that quality transactions happen on the platform.
• Lastly, like in the case of equities, P2P lending also has in-built diversification mechanism and the success of P2P lending relies on diversifying across risk baskets. Spreading the risk is the key to returns.

It may still be early to look at P2P lending as a substitute for equity as an asset class. But P2P lending is certainly emerging as a strong alternative investment option.