In my last article, Who's afraid of P2P financing?, I shared about my initial experience of P2P financing through Funding Societies Malaysia. So, if you haven't read Who's afraid of P2P financing?, I strongly suggest you give it a go.Credit Yourstory.com
Now, not everyone has the appetite for the volatility of equity investment (shares investing), and its derivatives. But, at the same time, I am sure most of us are seeking other investments which may yield better returns than conservative investments such as fixed deposit and bonds. This is because we are living in a low interest rate environment ever since the last global financial crisis in 2008. Interest rate in Malaysia, although higher than most developed economies such as Japan, USA and Europe, has remained stagnated since 2008. Low interest rates couple with higher inflation will see your hard-earned savings slowly diminishing, in terms of purchasing power.
Between 2008 and 2016, fixed deposit in Malaysia, on average, yields a measly 2.85%.
Exacerbated by a rising inflation rate since the beginning of 2017, which has been hovering around 4% mark and hit a high of 5% in March 2017, higher inflation rate may have nudged us to look elsewhere for higher yields other than the low return generated by fixed deposits.
As for me, I only maintain a minimum amount in fixed deposit for a rainy day. My logic is simple; putting too much money in cash is not going to benefit me in the long run. In fact, it may be detrimental. Hence, this is where P2P financing comes into the picture as it provides an opportunity to achieve a balance between a manageable risk and considerable return.
So, let's get down to it.
What is your experience of P2P financing with Funding Societies Malaysia?
I am pleased to report that I have received my first monthly return from a crowdfunding which began in May 2017. I have made an initial test investment of RM1,000.00 in a crowdfunding exercise which raised RM1 mil for a small and medium-sized enterprise ("SME"). I did this after satisfying myself of the viability of the venture by carefully reading the investment fact sheet provided by Funding Societies Malaysia (think of it like a product disclosure statement).
Funding Societies Malaysia also performs stringent due diligence and credit assessments to sift out SME with bad creditworthiness - like how any banks would conduct themselves before approving a financing facility.
In this particular crowdfunding exercise, the investment tenure is for 6 months with an interest rate of 10% per annum. That is effectively, 5% interest over the course of 6 months (excluding service fee). Some crowdfunding exercise may yield up to 16% per annum (even after deducting service fee).
So for July 2017, I received RM174.99 from the investment, of which, RM166.66 is principal and RM8.33 is the interest (or the yield). RM1.74 (or 1% of investment) is deducted from RM174.99, as service fee for Funding Societies Malaysia, thus leaving me with a balance of RM173.25.
A thing which I am particularly fond about P2P financing is that the money received from the instalment repayments can be reinvested, in another crowdfunding exercise, as soon as it is made available to me. In other words, if there is an available crowdfunding exercise (there are about 2-3 crowdfunding exercises per month on average), I can reinvest my balance of RM173.25 through Funding Societies Malaysia. Hence, I am constantly generating income, as I should, because inflation never sleeps.In my case, a yield of 10% per annual (excluding service fee) is handsome and definitely ample to tackle a rising inflation.
How would you rank P2P financing against fixed deposits and bonds in terms of yield?
Because P2P financing via Funding Societies Malaysia could potentially yield up to 16% of interest per annum (after deducting service fee), it has a return which is much higher than that of fixed deposits and most investment grade bonds (the AAA or AA-rated bonds).
See, by taking on an acceptable risk, you could be in a position to potentially receive a yield of about 4-5 times higher than that of the yield from a fixed deposit.
How does P2P financing stack up against investment in the share market (equity)?
P2P financing is an investment in debt as oppose to an investment in shares (equity). Hence, it has zero correlation with the performance of the share market. In spite of that, the yield from P2P financing is comparable with the yield from investing in the share market, which averages to about 7-10% per annum, in the long run.
Furthermore, P2P investing is definitely a suitable investment for those who cannot stomach the volatility of the stock market (like my mum) or for those looking to balance their portfolio with some high-yield debt investing (like me).
As an investor, I can truly appreciate the element of certainty of the return from P2P financing. For example, I know beforehand the return of investment which I will be getting from the get-go.
P2P financing is definitely a strong contender to other conservative investment such as cash or bonds. On the other hand, equity investors could also benefit from a high-yield diversification into P2P financing.
Like any other investments, the element of risk is inevitable and should be accepted as part and parcel of investing. With proper risk management, the risks involved in P2P financing can be greatly reduced.
In my next write-up about P2P financing, I will share some considerations which I personally make before investing in a particular crowdfunding exercise. Such consideration is part of my risk management strategy which I hope will be useful to you.So how do you find P2P financing? Do drop me a comment.
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