P2P Lending: How much to invest in a note/loan?
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” – Sun Tzu, Art of War
Just the other day, I was posed a question regarding what is an appropriate amount an investor should invest in an investment note/loan.
Unfortunately, there is no hard and fast rule to that question as there is a myriad of factors which governs the way we discern how much to invest in a note. These factors include personal experience, financial circumstances, risk, age, objectives, and the list goes on. Because of those reasons, investing is such a personalised endeavour; what works for me may not necessarily work for you.
However, you could take into account these factors in determining how much to invest in a note.
P2P lending operators often set a minimum investment amount which must be fulfilled as a condition to invest in a note. Funding Societies Malaysia, for example, has a minimum of RM100.00, per note. This low barrier to entry not only makes investing accessible but also allows investor to structure their portfolio with ample wiggle room (as we will see later)
With that condition, an investment in a note would never be less than RM100.00, so long as it is with Funding Societies Malaysia.
SIZE OF PORTFOLIO
Evidently, the size of your P2P lending portfolio would be a factor in determining the amount which goes into a note. The bigger the size of a portfolio, the higher the tendency that more money would be invested in single note, and vice versa.
If you intend to invest, say RM10,000.00, it may be easier to figure out how many portions should subsist from that RM10,000.00. Hence, by investing RM1,000.00 in a note, you’re investing a tenth, or 10%, of your portfolio into that note. Whether that is risky depends somewhat on the potential return of the investment.
POTENTIAL RETURN OF PORTFOLIO
P2P lending uncloaks a useful advantage by allowing you to determine a rough return on your investment. Every known factor in an investment reduces its overall risk as risk has an uncanny association with uncertainty. As an example, it is the uncertainty of Mr Market which makes an investment in stocks inherently riskier than an investment in fixed deposit.
As investors, you must make use of any known factor to the fullest. In P2P lending, knowing how much return that is likely to materialise allows you to comprehend and adjust the amount, to be invested in a note, from a risk point of view.
To demonstrate the idea, lets picture a portfolio of RM10,000.00 which consists of 10 equal notes of RM1,000.00. Assume also that, all in all, the portfolio yields 10%, or RM1,000.00, per annum. If there was a default on just one note, that portfolio would potentially lose RM100.00.
(9 remaining notes x RM100.00 return per note) – (1 defaulted note x RM1,000.00)
RM900.00 – RM1000.00
However, if the same portfolio had 20 notes of equal portion of RM500.00 or 5% per note, and just one note defaulted, the portfolio would, on the other hand, record a gain of RM450.00.
(19 remaining notes x RM50.00 return per note) – (1 defaulted note x RM500.00)
RM950.00 – RM500.00
As demonstrated with simple math, we could calculate how much risk to undertaken per note. That, and coupled with the low barrier to entry, you are able to structure your portfolio to determine how much to invest per note.
Keep in mind that this is a crude example and the likelihood of more than one note defaulting would inevitably increase with the number of notes invested.
The golden rule is to diversify your P2P lending investment to as many notes as possible. Diversification will spread the overall risk of your P2P lending portfolio. Because of the way P2P lending is structured, diversification diminishes risks but not potential returns. [See: Peer-to-peer (P2P) Lending: Maximising gain and reducing risks]
Do you have an opinion of how much to invest in a note? If so, please do share.
Register an account with Funding Societies Malaysia now as they will top up an additional RM50.00, for free, into your account when you deposit and invest a minimum of RM1,000.00. To participate in this special promotion, please register an account via this LINK (be careful not refresh the link before completing the registration as it will affect the promotion code) or alternatively, use the promotion code: j1mzpcw5 when registering through Funding Societies Malaysia.
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This article is written in association with Funding Societies Malaysia.
It depends on a lot of factors.
For myself due to the small amount of funding that I have (I had earmarked most of my funds for higher educations) and I have just started, I will go for the minimum so that I have enough to diversify my risks.
The general guideline I will have for myself once I have enough fund will be to put in less than 1% of my total portfolio for each borrower.
If the borrower has existing facilities that still need servicing, I will prefer to go for the minimum even if it is still way below my 1%
@bendahara That would be ideal. But to invest less than 1% of your total P2P portfolio in each note would inevitably mean investing more than 100k into P2P, as the bare minimum to invest in any note is RM100.
In Singapore it is 50 sgd minimum. So to have 100 loans at that minimum, you will need about 5000 to form 1%.
However I forget that some minimum is more than 50 dollars. So if you have a 1% minimum at 500 is 50k.
@bendahara how do you track that it's 1% for each borrower though? download the portfolio list?
I do keep track of every loan via an excel spreadsheet.
So that it can give me a view of all my transactions by month and by sectors as well as my growth rate.
Right now the tracking is still very raw as I am still making improvement to the spreadsheet
I think the fact that some of us are still using Excel to track just shows that the platforms are not able to provide us the tracking insight and details that we want in an appropriate manner grin
@dc are you using excel too? haha not sure if a 'preview' a sample of the excel is too much to ask, but what do you (and @Bendahara too!) actually track? just wondering why can't the P2P platforms just give this added info.
Yes I am track it so that I can consolidate the information and tally against what had been posted. Eventually when I have more than 1 platform, it will allow me to track both, compare and dissect accordingly.
@bendahara just curious, is there anything in your spreadsheet that FS can give you on the portfolio page (and downloadable)?
With the Auto-Invest, my portfolio is growing quite fast (45 investments with 21 ongoing), not sure if it makes sense to track manually. But now you're giving me that FOMO feeling cos I'm not tracking actively :b
What is FOMO?
I have all the basic statistic captured which I can dissect by sectors and probably interest earn per months and etc.
It is something that I want to implement for the lending portfolio instead of just for FS.
@Bendahara that's a nice tool. the p2p lending platforms are increasing in number in malaysia too, and some thing like that will definitely help keep track of all your investments. A few of my friends who invest in UK lending companies are doing something similar. I will try to ask them and see if we can use those tools too.
It is a good idea to see their templates to see what do they record
@bendahara FOMO = Fear Of Missing Out
Okie got it. BTW are you investor in Singapore or Malaysia?
I am from Singapore
FOMO - Fear Of Missing Out
I think no need to FOMO @yingyme , everyone has their own style and need to have more information so it's up to them to decipher. Some more active, some more passive. It's up to your own comfort level.
For me I started off tracking in Excel because I wanted to know when was next repayment dates etc and have a rough forecast how much I would be receiving in the coming weeks. With the latest FS website upgrade, I am now quite pleased with the information given (ie. expected repayments in coming months and the ability to filter investments by loan status). Also, just like you, came to a point where tracking so many investments at the same time became a real pain. I guess you could say the confidence I have in FS has made me less needful for an Excel sheet to track information. For MS, well, don't get me started on that one...
Very well said DC
@DC Thanks for your kind words. Our web development team at FS is quite happy to see investors are finding the new website both pretty and powerful!
Regarding tracking your p2p portfolio, a few investors I have spoken to have mentioned they do something similar. Have you ever looked for online tools which can help you make this process smoother?