Planning for their children’s education is probably the first major financial goal-setting new-parents do. As the kids grow out of diapers and bottles and move on to guitar classes and abacus; parents are on a perpetual lookout for funds to finance these ever-growing needs. It’s not just about school fees, but also extra classes and extracurricular activities.

Traditionally, parents have depended on Fixed Deposits, Savings and Children Education Policies to meet such needs of their children. However, with decreasing returns from these traditional sources, new-age investments may just be the way forward. Peer-to-Peer (P2P) lending is one such emerging asset class that has the potential to be a great source of investment for lenders, contributing to their child’s education fund.

Increasingly high cost of professional courses and decreasing returns from existing options

At the turn of the decade, most insurance companies launched Child Education Plans with much fanfare - celebrity endorsement and huge marketing blitz. With easy EMIs, flexible premiums and inbuilt insurance plans, these seem like an ideal option for parents. However, just a few years later, most of these funds have either foreclosed or are witnessing lower NAV than promised.

On the other hand, the cost of education is rising year-on-year. In 2016, IITs increased tuition fees from Rs. 90,000/- to Rs. 2,00,000/-. The impact is not just in higher education. a fee of private schools has tripled over the last 5 years. Other than the tuition fee, annual charges and cost for a cafeteria, transport, and stationary have increased by more than 20%.

In such a scenario, it is important for parents to start investing early and in high return Investment Options to create a fund that can finance the future education needs of their children.

Unfortunately, as the cost of living has increased, income levels have not gone up in tandem. There has been a significant drop in returns from traditional instruments such as PPF and fixed deposits. Although these are safe investments, they do very little in terms of delivering returns. This is especially true now as the interest rate on these products has gone down significantly over the last few quarters.

P2P Lending: A Smart, new-age investment

Stable Returns: One of the main reasons the Child Education Plans that I quoted above did not take off is because such schemes are always linked to the vagaries of the market. The world is a difficult place to predict after 2009 and even the best economists at times struggle to predict correctly. What is, however, certain is the fact your child will need an education, he or she would have their needs and catering to that will only get more expensive over time. P2P lending is removed from the fluctuations of the stock market and provides predictable and stable returns. Even when, in the past, the stock market has crashed, globally, P2P lending didn’t stop & borrower continued to pay lenders money. Also, in the case of defaults, there is legal recourse available. By spreading your investment across multiple borrowers, you will begin to mirror the overall default rate of the platform, gaining stability and consistency within your portfolio.

Higher Returns: Other investment options that can be considered safe range from various types of bank deposits to NSC, PPF, government bonds. Not only do they give very low returns, ranging at the most 7%, but most also have lock-in periods. Safety always comes at the cost of liquidity, which can prove to be particularly problematic when immediate funds are needed for college admissions or extra courses.

On the other hand, market-linked investments like stocks, Mutual funds, and SIPs offer better returns of around 12% to 14% p.a for investors with a long-term horizon, but then again this is neither assured nor guaranteed. P2P lending is a hybrid investment of sorts, where the investment return is high and there is relative surety about your returns. For the 95% of Lenders that are already lending on Faircent.com, gross returns to the tune of 18% to 24% per annum have been achieved.

Month-on-Month Income: One of the biggest advantages of P2P, however, is the power of compounding that P2P provides. Once you have started investing in P2P as a lender, you are bound to receive a part of the principal amount and interest the very next month.  You then, have the option of reinvesting the same amount you received, thus increasing your returns even more. A feature that allowed banks to make handsome returns has now been democratized and available to everyone. In case of a sudden requirement for a child’s education or extracurricular activities, the said amount can easily be withdrawn from the online wallet. 

P2P lending can provide the much-needed diversity to your investment portfolio n case you already have other instruments of savings. A good rate of return coupled with the fact that you start getting returns almost immediately is a huge boon. Also, merely adding Lending to your mix of investment portfolio can be a wise decision. The old adage of not having all your eggs in one basket certainly makes sense.

As with any investment P2P lending does come with its own set of risks. However, we have seen that responsible lenders who understand how to mitigate risks have rarely suffered a loss. The benefits far outweigh the risks involved and while it may not be a conventional method of saving for your child’s future, it can be very fruitful.

With RBI announcing regulatory framework and recognizing P2P Lending platforms as NBFC-P2P, it may be an opportune moment to tap this investment opportunity.