How to boost your retirement income with P2P Lending

The discourse around P2P lending has always been centered around what it means for borrowers and the advantages they can derive. However, what gets missed is that P2P lending has the potential to be a great source of investment for the lenders contributing to their retirement fund.

Increasingly high cost of living and decreasing rate of savings

According to the recent Mercer's 23rd annual Cost of Living Survey, India has seen a significant rise in the cost of living across most of its cities. Mumbai (ranked 57 worldwide) holds the pole

position as the most expensive Indian city, followed by New Delhi (ranked 99). With Chennai at 135, Bangalore 166 and Kolkata 184, every Indian metro city finds a place in the top 200 most expensive cities in the world.

Coupled with the high cost of living is the steadily rising cost of health both in urban and rural India. By the time one retires, the frequency of accessing healthcare will also go up. Medical insurance, doesn’t always cover all eventualities and you do need your own money for day-to-day medical expenses like medicines and consultancy.

As the cost of living has increased, income levels have not gone up in tandem. Similarly, most retirement plans seem inadequate to cover up for the rise in cost of living. In fact, there has been a significant drop in returns from traditional retirement saving instruments such as PPF and fixed deposits. Although they do have the advantage of guaranteed principal and is one of the safest investments around, in terms of value creation, it does very little for the investor. This is especially true now as the interest rate on each of these products have gone down significantly over the last few quarters.

In such a scenario, it is important to find products that can beat the rise in costs and provide the necessary cushion. P2P with its high rate of return, has the wherewithal to take care of rise in cost of living and provide for a better retired life.

P2P lending is an investment delivering multiple benefits when building a retirement plan:

  1. Add Lending to your Portfolio Mix: The adage that talks of not putting all your eggs in one basket still holds true. An investor should not limit his portfolio to only a few asset class, but focus on investing across investment opportunities so that market fluctuations do not have a huge negative impact on their retirement funds. A healthy retirement portfolio must have a mix of both stable (guaranteed but low returns) and high return investment options. Lending is one of the most profitable asset class if done prudently.
  2. Steady and high returns not Linked to Stock Markets: P2P lending adds to building such a diversified investment portfolio while delivering returns that are not merely comparable, but often preferable to returns from other investment instruments such as mutual funds, stocks, and SIPs. At 7.8%, returns on PPF is now at its lowest since 1980. Similarly, the rate of the NSC has lowered down to 7.8% and of fixed deposits around 7%. Interest on savings deposits is also not doing any better. In the last few months about ten key banks in the country have slashed interest rates on savings bank accounts and most hover around 3.5% mark. It is well known that bank rates never rise in commensurate with inflation. Add to this, taxes payable on the interest earned from these deposits and returns fall even further. Market-linked investments offer slightly better returns hovering at around 12% to 14% p.a for investors with long term horizon. P2P lending is a new asset-class that is delivering high returns. For example, Lenders on are earning gross returns to the tune of 18% to 24% per annum on an average by building a diversified loans portfolio.
  3. Income Generation & Power of Compounding:   Another reason that P2P investment does well is because investors can compound their earnings. Lenders are earning back part of their investment, both principal and return, every month. As you continue receiving interest and principal payment, you have the ability to keep reinvesting it. This re-investment of returns allows them to counter inflation through compounding returns, hence adding to the retirement fund balance.

It is, however, important to understand that like any other market-linked investment, there are no guaranteed returns. Risk of default is a genuine risk. However, these can be managed and mitigated by taking few smart steps like understanding the borrower details, investing small amounts across large number of borrowers, investing across risk buckets and building a diversified portfolio.

Even with moderate returns P2P lending is a smart investment with higher returns that beat inflation. It’s time to add it to your portfolio.

This article was first published in on September 16, 2017.