How much Diversification is enough in P2P Lending?

A lot has been written about diversification in peer to peer lending, including on this site .It is the most important factor in P2P lending. Beginner investors sometimes pay too much attention to the details of each individual loan, occasionally forgetting to simply diversify their investment across hundreds of loans.

Many get really frustrated after few months,  feel betrayed, turn, and doubt the  entire asset class, are almost always investors who simply failed to diversify their initial deposit in enough loans.

Lot of people see my portfolio of P2P and then start investing in those platforms. An important point which most people overlook is that my portfolio allocation is applicable only for the size of capital I have invested.

To elaborate it let’s assume if somebody has only 50000 to invest and they put their money in Rupeecircle only  how many loans they can invest in? Max 10 Loans. Even if 1 Loan defaults they  have a NPA which is close to 10%. People start panicking and stop the investment in that platform.

The truth is 1-2 loans can default in your portfolio yet the total platform NPA percentage can be very low. How?

If the platform has disbursed loan worth 10 crore and 5% is NPA level which means around 50 Lakhs is delinquent. Your portfolio is 50000 ,it can have 2 loans in default ,somebody else can have a portfolio with 0 default and thus total default is still 5%. Numerous combination are possible.

Its a very challenging question to identify at what level  we can say that our portfolio of p2p loans has become fully diversified. Basically, how many loans  does it take? To explore this concept I studied the performance of the P2P platforms in other countries got the data.

There were 2 factors on which it hinged:

  • Number of Loans obviously
  • Risk Category of Loans.

Below are the Charts which I got from a US P2P lending report.

LendingRobot-Impacts-of-Diversification

Total Portfolio: 146 Loans for breakeven

Positive-Returns-Point-_-Lending-Club-A-Grade-Loans

High Grade Loans:60 Loans

Positive-Returns-Point-_-Lending-Club-B-Grade-Loans

Medium Grade Loans: 120 Loans

Positive-Returns-Point-_-Lending-Club-C-Grade-Loans

Low Grade Loans:164 Loans

It is evident that  for diversification we need more low risk loans but obviously our returns are higher for high risk loans. So how do we balance it.

How do we manage this problem? There are 2 ways.

  • We choose platforms which match our investment capacity.
  • We increase our platforms when we increase our portfolio size

A platform which has short dated loans and small ticket size is ideal for small capital as the churn is pretty high and in no time you have diversified into many loans while a higher capital requires a combination of loan tenors so that there is no shortage of loans to invest at any given time

I have created a table which will help to choose platform combination based on your investment capital and rationale. I have recently started investing in a new platform called OMLP2P. When the portfolio size increases it becomes really hard to find good loans and it become necessary to evaluate new platforms. I will cover it’s performance when I publish my portfolio results.

I have marked in green the combination of  platforms which should be chosen based on investment capital amount.

Eg: for someone with 1lakh-2.5 Lakh capital: lenden,cashkumar and XRated loans(1000rs) in I2I

I would suggest not to invest in P2P if you don’t have atleast 40-50k to invest else you run a risk of under diversification.

Lenden has the smallest ticket size(500) and lowest tenor (3 months) hence it is perfect for smaller capital while rupeecircle for people with larger capital

As your portfolio grow you can keep adding new platform and higher risk category. Based on my experience 5Lakh is the amount after which your returns start stabilising .

Once you have started investing you will have another problem,how much amount of good loans can I find on a platform in a month. I have created a table based on my experience, the amount of money which can be deployed in the various platforms in one month.

In Lenden I use auto invest so there is no hassle to evaluate borrowers. Other platform I check the borrowers before investing as ticket size is higher

Platform Referral Links:

I2I Account Referral Link(Use Code I2I50%DISCOUNT while paying to get 50% off,Mail me after registering to get further benefits)

Rupee Circle Referral Code- PIND145
Rupee Circle

LendenClub Referral Code – LDC11989
LendenClub

OMLP2P Referral Link

OMLP2P

Mail me to get Cashkumar Referral

Creating Liquidity Using P2P lending

One Important feature of P2P lending is that it pays EMI which is sum of the principal Invested and Interest.

I had covered how it can be used as an emergency fund in one of my earlier article.

Parking Emergency Fund In P2P Platform

Today I will  demonstrate how to get a ball park figure of  your  liquidity and how to optimise it to your advantage.

Tenor of P2P loans are from 3 months to 3 years.  We can clearly demarcate the Platforms as short dated Loan platform and long dated.

Cashkumar and LendenClub are the short dated.

I2I funding , Rupee Circle are Long Dated.

How Does this information help me?

I Can calculate the average maturity of my platform which will give me an idea of my future EMI. I will tell you the shortcut method. To calculate the exact liquidity you need to download the report and then calculate EMI

  • For Lendenclub its very simple,Let’s say you have invested 2 Lakh. 90% is in 3 months loan.Its means around 1.8Lakh is going to be received in the next 3 Months. The amount will be slightly higher due to interest .

If we consider equal instalments I Can assume that around 60K will be received every month.

  • Cashkumar has higher tenor ,approx 4-10 Months. We can take average as 6 months. Let’s say we have 1.5 lakh invested.It means that around 25k per month.
  • For I2I and RupeeCircle average duration is around 24 Months. So we divide by 24.If we have 2.4 Lakh in total. It means  I will get 10k per month.

If I calculate the net available EMI each month then this is what  I will get:

It mean’s I have around 1 Lakh at my disposal in the next 3 months.How can I use this to my advantage:

Let’s compare 2 scenario .

One in which a person keeps 5 Lakh in Liquid Fund for liquidity and Emergency and second scenario where we use P2P lending to create liquidity.

One important factor is zero day Liquidity. You need to have  a portion of your liquid wealth which can be drawn at any time. I recommend having atleast 1-1.5 Lakh for someone who has almost zero liabilities. It can vary depending on the number of dependent and liabilities

The difference in the net return show how much better scenario 2 is . In a period of 15 years this strategy will help you to achieve 50% higher corpus.

If we wish to have more liquidity we can put more money in  Lenden and Cashkumar or if we have sufficient liquidity we can put money in  Long dated platform like I2I and Rupeecircle to lower reinvestment risk due to cash drag.

 

PS:

I2I Account Referral Link(Use Code I2I50%DISCOUNT while paying to get 50% off,Mail me after registering to get further benefits)

Rupee Circle Referral Code- PIND145
Rupee Circle

LendenClub Referral Code – LDC11989
LendenClub

Mail me to get Cashkumar Referral

 

 

REIT vs Real Estate

What  is A REIT?

REIT stands for Real Estate Investment Trust

REITs are securities linked to real estate that can be traded on stock exchanges once they get listed. The structure of REITs is similar to that of a mutual fund. Just like mutual funds, there are sponsors, trustees, fund managers and unit holders in REITs. However, unlike mutual funds, where the underlying asset is bonds, stocks and gold, REITs invest in physical real estate. The money collected is deployed in income-generating real estate. This income gets distributed among the unit holders. Besides regular income from rents and leases, gains from capital appreciation of real estate also form an income for the unit holders.

In India People have an affinity to Invest in Real Estate either through buying Plots, Independent houses or Flats.

Uptill now this was the only mode for taking real estate exposure but with the launch of Embassy REIT a new mode is available.

Background of Embassy REIT:

The Embassy Office Parks REIT’s initial public offering (IPO) is India’s first real estate investment trust listing (REIT) and sponsored by American equity investor Blackstone Group and Indian developer Embassy Group. Blackstone and Bengaluru-based Embassy Office Park are looking to raise Rs 4,750 crore from the IPO

When it comes to office and commercial real estate, it can’t get better than what the Blackstone Embassy Office Park REIT offers. Here is a sample: up to 32.7 million square feet of seven global quality office parks in India’s fastest growing cities — Bengaluru, Pune, Mumbai and Noida; 160-plus marquee tenants such as JP Morgan, Google, Microsoft, Accenture, PWC, Rolls Royce.  Almost half of this REIT’s portfolio is rented out of Fortune 500 companies on an average lease life of 7 years.

These are simply the best rent-yielding assets you can get in the country’s commercial real estate, which until this REIT came along, a retail investor couldn’t even dream of owning. What was available for investments in commercial were dodgy “assured” returns schemes from low-on-credibility builders who couldn’t even raise enough money from institutional investors to finish their building and hence took to wooing retail investors with unsustainable returns and often left them stranded with unfinished projects and broken promises. Now, you can dramatically upgrade in terms of quality with the Blackstone-Embassy REIT. Your money is well diversified over 75 grade A assets in prime locations

Returns will be in the form of Rental yield + Capital appreciation

Which will be  around 8% in rental yield and 3-6% Capital appreciation in the long term depending how the real estate market fares

graph

 

US market REIT vs Equity performance:

 

In USA REIT have outperformed stocks in the long run. Even if they don’t outperform in India they are good addition to diversify the portfolio

Let’s Compare REIT vs Real Estate.

One caveat I would like to add is that if someone plans to buy house for living then off course  the comparison is futile as it’s a personal choice.

Various Positives of REIT over Real estate are:

  • Minimum amount to invest is 1.2 lakhs as of now which is quite low compared to the cheapest flats.
  • It has decent liquidity and can be bought and sold easily.
  • It is diversified across multiple quality assets unlike a single bet on a flat
  • You dont have to spend on maintenance ,parking, middlemen etc
  • No chances of fraud.
  • You can add this to your equity portfolio and thus diversify your investments.
  • Residential  rental is around 2-3% and retail people generally cant buy commercial property because  of non availability of loans

Positives of Real Estate:

  • You can take leverage through home loan( risky but can give high returns if real estate does well)
  • If you have deep knowledge  about the micro structure then a concentrated bet can be helpful( it’s like buying a single stock which becomes multibagger)
  • You can refurbish flat , use it to generate high yield if you have the right skill and connect.

Conclusion:

REIT makes sense for all those people who are bullish on the real estate sector and want to diversify their portfolio.

If  you have  very good knowledge about local real estate market, Decent networth or you getting a  very good deal then go for standalone properties

Is SIP better than Lumpsum Investment?

NO SIP is not beneficial

If you think SIP has the power to allay your loses or protect you from volatility as promised by the mutual fund houses, Investment advisory, then brace yourself for a shock!

We get salary every month so we are forced to invest every month.

If you have 100Rs now its better to put 100 now in equity than divide it into monthly chunks and then put it in equity market

I Can prove it using Monte Carlo Simulation.

it is a tool by which we can simulate real world scenarios ,like how stock market can trend in future.

We will create 100 path and see the end result and check for ourself if SIP is the best choice or not.

We assume annual volatility of 12% ( which is the historical average) and risk free rate of 6.5% for simulation.

These are the various outcome we can have after 5 years.

Now let’s check in how many scenarios my average cost is less than 10000, i.e the cost if invested lumpsum today.

Below is the scatterplot of 100 simulations

Percentage cost less than 10000 = 23%

Min Cost = 7690

Max cost = 17880

Max benefit by averaging is far less while 77% time you are better off lumpsum.

Offcourse this is a simulated world and if we had a scenario where market is in depression for years and then goes up you will make profit but if we have such a pessimistic view of the market then why invest in the first place.

What I have done is a future scenario analysis. Infact we have backtested results of the US market.

https://personal.vanguard.com/pdf/s315.pdf

Why does SIP lose to lumpsum. The logic is :

  1. By averaging you are betting that the market will drop, saving yourself some pain. For any given year the odds of this happening are less than 30%
  2. So statistically market is more likely to rise, in which case you will miss the upside. With each new invested portion you’ll be paying more for your shares.
  3. With SIP you are insinuating that market is too high to invest all at once thus you are trying to time the market
  4. By doing SIP you are changing the asset allocation as you will have huge cash position
  5. You will miss out on dividends
  6. Your cash will give around 4–5% return while you choose not to stay invested
  7. SIP also has time horizon. Since the market tends to rise over time, if you chose a long horizon (say, over a year) you increase the risk of paying more for your shares while you are investing. If you chose a shorter period of time, you reduce the value of using SIP in the first place.
  8. Finally, once you reach the end of your SIP period and are fully invested, you run the same risk of the market plunging the day after you are done.
  9. Backtesting shows in the long run lumpsum has outperformed SIP

What works for SIP is that it its psychologically easier and does not give you cold feet in a crash . You don’t have to fret over huge market drops , but with time when your investment becomes huge you will again have to deal with it.

So Rule 1) : If you want to put 100 Rs in equity better to put it now. You cant do it with your future cashflow but you can do it with your what you have.

Some people put everything in debt and then start a SIP which is not a good strategy.

Rule 2) If putting a lot in Equity makes you nervous then park money in something which has high yield like equity and less correlation.

Eg: P2P lending ,REIT etc.

 

Why P2P Lending Allocation in Portfolio makes Sense

Peer to Peer Lending is a relatively new asset class in India but has been an active asset class in UK and US for more than 14 years now.

How does P2P lending fit in an asset allocation and what advantage does it provide compared to an Equity and Bond Portfolio?

Let’s see the performance of various assets in USA from 2007 – 2014 which was a very volatile period.

Two things are apparent from the Chart

  • In the short term each assets had it’s troughs and crest and there was no guaranteed investment
  • Over the long term (and even including 2008) stocks did deliver good returns compared to other asset class in the US market.

The Problem with Stock-Only Investing

The problem is that large and mid cap stocks are highly correlated investments. The same goes for other stocks: small caps, international stocks, and emerging markets . If one goes up, the others typically go up as well. As a result an account only invested in stocks tend to be very volatile in the short term .

All stocks(Mid,Small,large, International) move together which can create huge draw downs and can honestly give even the seasoned professionals cold feet.

Ideally, you would invest in places outside of stocks, like in real estate and bonds. These investments are great because they give us a place to put our cash to work that is far less correlated to stock performance. If stocks tank, bonds and REITs are less likely to be affected.

There can be instances when two different asset classes show high correlation as in 2018 between Real estate and stocks as the cause of the recession was real estate itself

Below is the historical correlation of various asset classes in US .

https://d2qh2u5m1l6y4n.cloudfront.net/media/other/howmuchtoinvest.pdf

A correlation value of 1.0 would be a perfect correlation while a value of 0.0 is no correlation at all. So when compared to stocks, peer to peer lending has an average correlation of between 0.13 and 0.19, a very low overall correlation! It should be noted that asset class correlation does change, so it would be great to see how this value changes year by year

For my portfolio P2P is currently yielding 16% and for the last 1 year it has hardly shown any significant correlation with Bonds and Stock market yield.

It has been highly uncorrelated with stocks and bonds. By including peer to peer loans in their overall growth-investments, stock investors are more likely to experience more consistent returns

How did P2P lending perform in 2008 in USA?

We can look at a mature credit industry that did experience this recessions: credit cards. Both P2P loans and credit cards are a similar investment: unsecured lines of consumer credit. And if we take the unemployment rate and stack it against the return that banks earned on credit cards , an informative picture begins to form:

It’s amazing to note that banks still did not lose money on credit cards during the 2008 recession. The stock market fell 57% in six months, yet major banks kept earning and earning.

In short, investors never lost money on credit cards, even during the 2008 recession, the worst economic catastrophe since the Great Depression. But returns did steeply dive by 20-40%, depending on the severity of the unemployment rate.

Thus a portfolio diversified through P2P lending would have performed better than pure equity portfolio

How Much Should You Invest in Peer to Peer Lending?

Minimum Amount:

As P2P lending is based on the principal of diversification I would first put a minimum amount people should invest.

  • If amount to invest is upto 50000 only invest in 500Rs Loan (like Lenden).
  • If 50000 to 150000 , invest in 500 and 1000 loans ,max 2500 (eg lenden, I2I and Cashkumar)
  • if 150000 + then use all platforms with maximum investment no more than 5000.

Ideally 4–5 Lakh is a decent investment size to be diversified across multiple loans and platform.

Allocation Percentage:

P2P lending falls somewhere in between Bonds and Stocks , while they provide stock like returns, the volatility is less like bonds .

P2P lending is high yielding, short duration, uncorrelated investing. Factor which should govern your allocation.

  • How much you have currently allocated to Equity and Bonds .

Most youngsters have high investment in equity and less in bonds as they have a long time horizon.

If someone has 70% Equity and 30% bond they can put 10–15% from Equity to P2P which will make there investment less volatile and also provide some liquidity in short duration.

For People who are in their middle age and have a very conservative portfolio of day 65% bonds and 35% Equity can replace some of the short dated debt funds with P2P lending to increase yield.

There is no sacrosanct number but depends upon your comfort with asset class,how well you monitor portfolio and diversify.

 

Model Portfolio Performance

There are 2 Kind of people :

  • Who believe you can’t time the market
  • Who believe you should invest in market only when it’s undervalued.

Both are correct to an extent , though it’s not impossible to time market but to do it consistently is impossible but it is possible to  improve your odds of  gaining higher returns if you  increase your  asset allocation when it is undervalued and slightly reduce it when it’s overvalued.

Again people will argue  that’s its inefficient because you have to sit on cash which doesn’t yield much but that opinion is based on the assumption that other asset classes do not give similar yields like Stock.

Why a Diversified Portfolio is important?

Assets which have low correlation with each other  don’t move  together ,it means when an asset value drops the other asset won’t drop that much and vice versa

Is it possible to create a portfolio which has multiple assets which have low correlation yet  overall high yield of portfolio . Let’s try doing that.

First we need to address the market factors which affect my assets:

  • Equity Price
  • Real Estate
  • Interest Rate
  • Currency Rate
  • Credit Risk
  • Retail Credit Risk

Our model Portfolio should cover three important factors:

  • Ensure Assets have low correlation
  • Portfolio Liquidity Matches our Requirement
  • Asset Allocation is in tandem with our market view and Risk appetite.

 

  • Assets have low correlation:

I have considered the asset classes provided in the table:

* REIT were launched recently, I  have annualised the returns achieved till date

All the assets in Green have practically zero correlation with any asset class and have almost zero risk.

I have already covered how we can create an Insured FD risk less portfolio.

Create a Risk Free Fixed Deposit Portfolio

EPF is sovereign debt. Arbitrage funds invest in cash/future arbitrage hence no credit risk.

So 31% of my portfolio is risk free and has a yield close to 8.2%.

Now I have to check correlation of 69% portfolio:

 

Equity with P2P lending Correlation:

For my own portfolio P2P and equity has not shown much relation as P2P returns have been consistent while equity had been volatile during the period. Historically let’s see how was the correlation.Based on the reports of 2008 Crisis P2P lending gave positive returns in that year.Well in future the draw down may be higher but still the correlation to equity has been low.

P2P Lending Is Profitable, Even In A Recession

Equity vs REIT: Equity and REIT have historically low correlation and even during the 2008 mortgage crisis correlation never reached one.

https://www.reit.com/news/blog/market-commentary/return-correlations-between-reits-and-broad-stock-market-property-type

Similar studies have shown how gold and Equity can have negative correlation during crisis and give a portfolio boost during crisis

 

  • Portfolio Liquidity Matches our Requirement

If you invest in a portfolio without liquidity in mind you might have to unwind the portfolio at the wrong time which can really ruin your investment strategy. It is prudent to have ball park figure of liquidity.

People who want immediate liquidity should allocate more to Arbitrage Fund, Short dated P2P etc.

  • Asset Allocation is in tandem with our market view and Risk appetite.

We have achieved 2 things by having this diversified portfolio compared to  only equity portfolio.

Advantage 1:

Our asset classes : FD , P2P , arbitrage funds  have lowered the volatility which an equity only portfolio faces.

Almost 50% portfolio has close to zero volatility.

Advantage : You don’t  lose your everyday sleep because of 5-6%  drop in portfolio.

Advantage 2:

Though our portfolio is less volatile does not mean it is free from  black swan events like 2008 Crisis or impact of market risk factors.

What is good about this portfolio we can play market risk factors to our advantage :

How?

We know currently rupee has strengthened , Interest Rate has gone down and Credit spread has gone up.

I have made my portfolio exposure higher in US equity, Credit Funds and short dated funds. When these factors reverse I will book profit and transfer it to Long Dated Bonds etc.

We know certain things follow cycle  :

Interest Rate

Currency

Equity

We cant time them but we can increase our weightage based on the fact that which end of spectrum they  are. If Equity valuation is over the top I will allocate more to other asset classes.

At any time I have sufficient capital in other asset classes to  transfer to an asset which has become cheap.

Even in case of a black swan event unlike a pure equity portfolio my draw down would be less in some asset classes , like insured FD, arbitrage etc.

Additional Feature: I have put my long term holding as collateral and used that to get derivative trading margin. I am able to create conservative short position to balance some of my long portfolio and also earn some yield in flat market. Offcourse this requires to have good understanding of option trading and should be implemented by those who understand the nuisances of options.

In my table I have prepared a column for my target return for each asset class and next to it I have put the actual 1 year performance. Total returns are published.

I will update the portfolio monthly  with rebalances if any

Conclusion: You can create a  balanced portfolio  which can give similar returns as an all equity portfolio with less volatility.

Real Estate vs Mutual Funds

Its not an apple to apples comparison !

POINT 1: House Return = Residential property Return + Your house Buying Skill

Let’s first start comparing Real Estate Return with Broad stock market Return

I have written few answers on this ,how the end results is determined by many factors

Without Leverage

Real Estate Return = Capital Appreciation + Rental yield.

we know rental yield is approx 3% for residential house.

So 8–9% is the approx return you need to make to beat a 12% Mutual Fund CAGR.

While 12% is the return of Nifty Index means that you could have blindly bought Nifty and made 12% but for a house a major part of Return is because of your skills:

  • selecting properties
  • Selecting Location
  • negotiation for price as there is no universal price.
  • Tenants you select.
  • How the area develops in the future .

Therefore buying a house is like buying a single stock which will go up or down based on how you selection skill and also on luck.

Here I have compared how buying House in Noida was disaster but Gurgaon a great deal even though both cities are in NCR

Rohan Rautela’s answer to Is buying a flat in India at a price of 50 lakh or more investment or liability?

POINT 2 : Leverage Play an important Role in delivering high Return or Losses.

With Leverage

Real Estate Return = Leverage * ( Capital Appreciation + Rental yield – Interest Cost)

Leverage Magnifies everything : Interest Cost impact, Rental yield Impact and Capital Appreciation Impact

I will show you how slight change in any factor can make one look more profitable than other:

Assume cost of house is 50 lakh,80% is loan at 8% Interest

Case 1: House appreciation is 10% per annum, Rental yield is 2.5%, Mutual fund gives 15% return in 20 years,tax saving is included ( we reinvest rental income and tax saved in mutual funds monthly)

So my property in 20 years grew to 3.66 Cr

Rental money and saved tax grew to 4.46

Mutual fund gave 7.14( includes 10 lakh upfront too invested at 15%)

property beats mutual fund by 1 cr

Case 2:House appreciation is 8% per annum, Rental yield is 3 .5%, Mutual fund gives 15% return in 20 years,tax saving is included ( we reinvest rental income and tax saved in mutual funds monthly)

What happened now???

because how appreciation dipped to 8% I am making net loss if mutual funds gave 15% return.

Bottom Line is if you leverage and things work out perfectly then you can call yourself to be smart else blame your luck.

POINT 3 : Real Estate is a killer of asset allocation for most people.

People are always worried about asset allocation and firm believer not to keep all eggs in one basket.

They will do endless research on the best mutual fund, best stock ,best debt etc.

Now look at the reality.

Mr X has 25 Lakh Corpus. Buys a home for 1 Cr, Put 20 Lakh upfront and rest 5 lakh is in mutual fund.

This is how asset allocation looks like:

Mutual funds: 20%

Real Estate : 400%

If real estate drops by just 10% you will lose 40%!!!!!!!!! but most people are not worried why??

Because you cant see the daily Mark to market value on the computer screen every day. Nifty you can see everyday so cant take that leverage.

Your parents made money because of Loan Leverage. If they would have bought Nifty Futures and rolled it for 20 Years They would have made more money!!

Conclusion : Should you buy a Flat or Mutual Funds ?

  • You should have exposure to both. If you have 10 Crore in your account you can buy 1 Cr house but if you have 20 Lakh in account and want to buy 1 Cr then be aware of the risk you are taking.
  • Even if you are really bullish on real estate and want to take a loan which is significant compared to net worth ensure that interest servicing is a small part of your monthly salary and you would be able to service it even without a job for 8–9 months.
  • If you want to live in the house and its your dream then buy it for that , don’t fool yourself that you are doing it for investment
  • Buying a house is also a skill like picking a stock. If you think you have it then buy it ,don’t buy it because everybody does.
  • If you just want to take real estate exposure for diversification which is a good thing you can do it through REIT which has diversified commercial rental properties as underlying
  • Even if you have money you can still leverage for better optimisation of funds and tax benefit. Taking Loan should be used as an advantage not a dire need.

 

P2P Portfolio Analytics (March ,2019)

With the growing size of the book finding volume becomes  important and I will have to look for more platforms which can provide good risk adjusted returns. Any suggestions are welcome!

I have compiled my latest portfolio performance with NPA

Initially for the first 7-8 Months  realising NPA and delinquency was a challenge .If you act too conservative and book all the delinquency as NPA it will become lot compared to the Interest earned  because you are  booking losses upfront  while the good loans will be giving interest gradually over a period of time.

Once the portfolio has matured you have enough closed loans and NPA to get an exact picture and the returns start becoming consistent due to the vintage.

A  shortcut method for a new portfolio to guage performance is to see if the Interest earning growth is faster than NPA amount after 3 -4 months of Lending. Basically if the gap between the 2 is increasing positively  it will continue to increase and if your NPA are growing faster than your Earning then you need assess the strategy.

Portfolio Composition

March Allocation

 

February Allocation

 

Portfolio Changes:

  • Still withdrawing EMI from Faircent and putting them in Lenden
  • No changes in I2I except the EMI are reinvested
  • Fresh Inflows to Cashkumar and RupeeCircle.
  • Plan to have almost 30%-35% exposure in RupeeCircle + Cashkumar in the next few months

 Portfolio Performance:

 

 

  • March ROI seems higher than other months. Main reason for that is I have increased exposure in RupeeCircle and Cashkumar while reduced in Faircent and they have zero NPA till now
  • NPA for Lenden is twice of I2I but the average ROI is also almost 2X of I2I which makes them almost at  par.
  • In Lenden I have put everything in  auto disbursement and almost 85% exposure is in  “Unidentified Category”. Basically  here I am not trying to do my own evaluation but randomly lending with very small ticket size(500). Maybe if someone evaluate the loans they might be able to generate slightly higher return but it would be a pain evaluating each 500 Rs loan
  • 50% of my I2I NPA is because of one loan which I had disbursed when I was new to the platform. I made a mistake of disbursing 10000 in one go. This highlights how important diversification is in P2P . For platform like I2I where ticket size is 5000 you should stick to that size and not disburse more than that to one loan.
  • RupeeCircle surprisingly has shown no delinquency till now. I expect some delinquency in the future. Till then I can enjoy my returns.
  • Cashkumar , I have observed few delays but no defaults till now.

 

1 Year Review of The P2P platforms:

LendenClub: 

Pros:

  • Lot of Loans, idle cash is not a problem.
  • High ROI, relatively low fees.
  • Auto disbursal which makes the process almost automated
  • Small ticket size of 500 makes diversification easy

Cons:

  • Collection process is not very transparent.Status of Defaulted loans not available on platform.
  • Customer service is not very good. Have to send multiple mails to resolve queries

Advise: Use it for short term ,hassle free lending with 500 ticket size. Expect returns between 13-16% without doing any analysis of the borrower.

 

I2I Funding:

Pros:

  • Detailed analysis of listed borrowers ,easy to evaluate
  • Good collection activity,Many delinquent loans end up as active loans again due to collection follow up.
  • New category of X rated Loans with small minimum ticket of 1000 and short duration available now to help diversify.
  • Good customer service

Cons:

  • less number of loans available at a given time. Need to proactively find loans on the platform to lend
  • As minimum ticket is 5000 need more capital to diversify effectively. With the new X category loans this might get sorted to an extent

Advise: Use this platform for good quality loans . Can put 20-25% in short dated loans as they are new and their performance history unavailable. Preference order should be Government employees ,Salaried people  and then  genuine business men whose details are available on social media platforms too.( D and E Category Loans)

RupeeCircle:

Pros:

  • High ROI loans available (24-30%)
  • Wide range of tenors available and abundant loans
  • No Defaults till Now(still a new portfolio)

Cons:

  • As minimum ticket is 5000 need more capital to diversify effectively.
  • Loan charges(50 Rs)  for any loan makes it better for loans more than 15 months

Advise: Use this platform in compliment with  I2I as ticket size and tenors are similar. With the high ROI,availability of loans and less NPA this may become a good performer in the coming months

CashKumar:

Pros:

  • Very High ROI (42%)
  • Very low Fees (0.75%)
  • All salaried Borrower
  • Minimum Ticket is 2500

Cons:

  • Available Loans frequency on platform changes periodically

Advise: Good platform for short dated( <12 Months)  loans. Can be used with Lenden as a money parking vehicle because of high liquidity due to short nature of loans.

.

I have been evaluating few other platforms .The major issue is that most don’t have enough volume to put substantial amount of money.

Footnote:

I2I Account Referral Link(Use Code I2I50%DISCOUNT while paying to get 50% off,Mail me after registering to get further benefits)

Rupee Circle Referral Code- PIND145
Rupee Circle

LendenClub Referral Code – LDC11989
LendenClub

Mail me to get Cashkumar Referral

Is Real Estate Investment an Asset or Liability?

It can be both an asset or Liability!

  • 10 years ago Flat bought in Noida is a liability today and in Gurgaon an Asset.

NOIDA

Buying Flats is like buying Equity . If you buy at the right price, Right asset and right time it becomes an asset or else a liability!

Many factors which will decide the outcome:

  • Your Cost of Loans
  • How much you are leveraging
  • Location, Location and Location( even within a city ,localities grow at different rate)
  • Real Estate market growth
  • The authenticity of the developer
  • Rental yield you will get

How many do you have control over? 2 maybe 3, out of 6

Are you an expert in assessing property or you want to buy because everybody is buying it?

If I suggest someone take 40 lakh Loan and buy Kotak Mahindra share today how many will do that!

They will tell me how can someone take so much risk even though chances are high they will make good return.

But people happily take loan 10 X of their annual salary to buy flats. Just because you cant see the price of Flat going up and down on your screen everyday doesn’t mean you are not taking risk!

You must be marvelling how much return your parents made in real estate. Just calculate the CAGR of those returns ,most are at par with Equity market.

What worked for your parents was Good Luck and Leverage!

They took a big Loan :

20 Rs their own and 80 Loan.

Paid Interest of let’s say 10% on 80 Rs = 8 Rs.

property grew at say 12% percent . They made 4rs (12Rs-8Rs) on 20 Rs investment = a cool 25% return

had the opposite happened .Real estate crash then!

They would have paid 8 rs and let’s say Real estate didn’t move .

8 Rs loss on 20 is 40% loss!!

Looking Back it’s easy to connect the dots. Gurgaon Flat owners can boast about their investment accumen and Noida Owners can blam their bad luck

It’s not about whether Real Estate is good or bad .

It’s about it’s whether you want to bite more than you can chew !

Conclusion:

If you have 100 Rs its ok to put 20 in real estate. If you have 20 rs don’t put

100 in it.

Hope is not the best financial plan.

PS:Now we Have REIT where you can take diversified exposure to commercial property .ideal for allocating some money to Real Estate.Create a well balanced portfolio rather than going in and riding your luck!

 

Create a Risk Free Fixed Deposit Portfolio

Most Short duration and Liquid Funds are marketed as instruments which provide higher liquidity than FD and slightly higher yield.

This is a myth because:

  • Short term (below <3 year) Debt funds are taxed at your tax slab which means it could be as high as 30%.
  • No matter how safe a debt fund claim to be they invest in corporate credit and they are susceptible to default. The slight excess return are not worth the risk.
  • Debt Funds with higher duration have high interest rate risk and for a non professional taking an interest rate direction call is not easy.

Long Duration Funds suffer from Interest Rate Risk!

If someone does not have immediate liquidity requirement they can optimise Fixed Deposit to get high yield at very low Risk!!

They can effectively Create a risk free portfolio delivering 8.5%

How to go about doing that!

Three major Pain Points of Fixed Deposit:

  • Taxed at Marginal Rate
  • Low Interest Rate
  • FD carry a credit Risk too if a bank defaults.

How to by pass these pain points:

We can use this tax guideline for our benefit to address first two points:

As per the current laws, any gift received in cash or kind exceeding Rs 50,000 is taxed in the hands of the recipient as “income from other sources”. However, this rule does not apply to gifts received from relatives. Additionally, any gift received on the occasion of your marriage, under a will or inheritance is not taxed in your hands.

Let’s assume that your parents are senior citizens (above 60) and have no income. You can gift them any amount of cash for investing in high-return instruments such as senior citizen’s savings scheme.

As senior citizens do not have to pay any tax for annual income up to Rs 2.5 lakh, the interest income does not become taxable unless it exceeds this exemption limit. This means you can invest up to Rs 25 lakh through each of your senior parents without any source of income if the annual interest or return is 10%. You can invest up to Rs 50 lakh through your senior parents and have a tax-free annual income of Rs 5 lakh.

Most FD provide additional interest rate to senior citizens plus there is no tax liability.This will ensure high returns and zero tax.

Now how to address the risk of default by bank.!

Another RBI notice will help us to tackle this problem.

1. Bank Deposit Insurance is covered by Deposit Insurance and Credit Guarantee Corporation (DICGC) which is subsidiary of RBI.

2. The maximum deposit insurance cover is for Rs 1 lakh per customer per bank.

The insurance is based on “same right and same capacity” as on the date of bank default.

As stated above all deposits i.e. savings, current, FD, RD, etc. across various branches of the bank, held by you in your individual name, would be treated as in “same right and same capacity” and considered as one total amount for insurance purposes.

But would be treated as held in “different right and different capacity” in following cases:

  • Account held in the capacity of a partner of the firm
  • As a guardian of a minor
  • As a director of a company
  • As a Trustee
  • As a Joint Account

And so each of them would be separately insured as shown in the example below

What does it entail??

If you hold joint account, the sequence of name is considered as different entity. So if you have two joint accounts with your spouse where in one case you are first holder and in second case your spouse is the first holder, both accounts would be considered as 2 entities and separate deposit insurance would apply.

So if both your parents are senior Citizen (A and B) and you are X,you can save in FD:

  • A : 1 lakh
  • B: 1 lakh
  • joint account A& B : 1 Lakh
  • joint Account B&A : 1 Lakh

You can also have a joint account with you as second holder with them and further deploy more money!

You can open such FD in other banks and repeat the process.

Its quite Interesting the Risk Free Rate for 3 years is close to 6.5% in goverment bonds which have a interest rate risk due to the tenor but by using this method to invest you have made your Risk Free Rate as 8.5% (IDFC, RBL,IndusInd provide 8.5% approx for senior citizen FD)

We have effectively made our Risk Free Rate 8.5 % FROM 6.5%

Footnote:

RBI circular on Insurance

https://m.rbi.org.in/Scripts/FAQView.aspx?Id=64