How to mitigate risks when investing with Peer-to-Peer financing (P2P) in Malaysia
Have you ever heard of an investment product that provides positive returns without having any risk involved at all? Well, we all know the answer – it’s a big “NO”. Unfortunately, every investment platform and product comes with its own risks, as returns earned are a reward for risk borne. The returns for investment assets such as stocks and equities fluctuate every day, with a mix of good and bad days accumulating to form the returns over time. However, investment products with fixed returns such as fixed deposits, bonds, and Peer-to-Peer financing (P2P) help to mitigate the risk of volatile returns.
Peer-to-peer financing is a type of direct lending to individuals or companies, where a platform acts as an intermediary to facilitate the lending and repayments. P2P financing is usually conducted online via highly specialised platforms. Through digital platforms registered with the Securities Commission Malaysia (SC), P2P financing allows investors to directly lend funds to SMEs and companies, in order to free up cash flow and working capital issues.
Both secured and unsecured loans are usually offered through P2P platforms, with products varying based on the borrowers’ needs. P2P financing platforms may have lower credit thresholds than traditional banks, allowing lenders to obtain financing where they may not have been able to through traditional methods. However, this may also indicate a higher risk, as P2P platforms may be more lenient. Some platforms successfully take this into account by evaluating loan applicants with alternative sources of data that may not be assessed by traditional banks to get an even more accurate gauge of a lender’s repayment ability.
However, despite the risk factors and the relative recency of P2P platforms, the P2P financing industry has demonstrated its resilience and reliability as both an alternative financing and an investing platform.
As of December 2021, approximately RM2.3 billion had been raised through over 30,000 successful campaigns and 4,200 issuers. More than half (54%) of the investors were under the age of 35, with retail investors accounting for 90% of the amount invested. This represented an increase in financing of RM1.14 billion in 2021, which was more than double the amount when compared to the year before. (Capital Markets, 2022)
As P2P financing continues to grow in Malaysia, we have identified the risks and proposed potential solutions in order to assist Malaysians to safely and successfully invest via P2P. Let’s dig deeper and find out how we can overcome the risks and maximise our returns associated with Peer-to-peer financing platforms.
1. Risk Involved: Losing principal invested
While Peer-to-peer lending platforms generally have fixed returns, there still exists the risk of principal loss via defaults. A default occurs when a borrower is not able to make their repayments on their loans, causing investors to potentially lose a portion of their invested amounts.
Proposed Mitigation
The solution to this is quite simple – diversified investments. As the adage goes, we should not have all our eggs in one basket. This means that investors should split their funds into different businesses and industries, and in the case of P2P, it’s actually investing into a variety of investment notes. In this scenario, a default will have a lessened impact on an investors total portfolio. CapBay has an Auto Invest function that automatically distributes an investor’s funds into 100+ notes.
2. Risk Involved: Not achieving the expected returns
While P2P financing usually provides investors with the potential for higher returns than savings accounts or fixed deposits, there may still be a risk of achieving lower returns than expected.
Proposed Mitigation
To ensure that investors receive their targeted returns, it is advisable to stay invested for longer periods of time, such as 2 -3 years. This allows investors to earn compound interest on their returns, as the profit earned can be reinvested. It may also be helpful to have your investments automatically re-allocated, in order to avoid having unutilised cash. CapBay P2P’s Auto Invest function allows investors to take a passive investing approach as the profits earned are automatically reinvested. We also have shorter investment tenures of between 1 – 6 months, that allows for more compounding interest.
3. Risk Involved: Credit Risk
P2P financing carries credit risk, as the risks borne by investors are tied to the repayment ability of the borrowers. This credit risk may be heightened as applicants for P2P loans may have poorer credit histories that hinders their ability to obtain traditional loans from banks.
Proposed Mitigation
To avoid this, investors should conduct their own research on the borrower’s profile properly before making an investment. Some platforms will require and conduct strict background checks on their borrowers before providing them with financing. This information will then be made available to investors to aid in the decision making process. CapBay takes pride and put in a lot of effort to ensure a low default rate where it’s currently at less than 0.1% since 2016 inception, reflecting our adherence to our strict credit controls.
Until recently, the only real option for obtaining a loan was to approach a bank or similar financial institution. Peer-to-Peer financing has made the borrowing process easier for SMEs and other businesses in order to assist with their growth. Similarly, investors can now invest and earn higher returns compared to other types of investments, while controlling the level of risk based on their investment appetite.
Thus, by helping to shed some light on both the risks involved and the solutions to overcome them, we hope that more investors will be well-equipped to maximise their returns with Peer-to-peer financing in Malaysia. CapBay ensures that SMEs and businesses have safe and secure access to financing, while also providing the opportunity for investors to earn reliable and consistent returns.
Begin your investing journey with CapBay today!
*This article is not meant to recommend CapBay P2P products or be used as a tool to make any investment or financial decisions. Product recommendations must be independently evaluated before you invest. Any product recommendation by CapBay must not be regarded as financial planning or financial advice.
