I would like to use bottom up approach when determine my P2P yield.
This figures are only applicable in Malaysia. My so call risk free rate like FD is 3%, almost guaranteed return is like our Employee Provident Fund (EPF) and Amanah Saham Fund Series under Permodalan Nasional Berhad (PNB), which is ranging from 6% to 8% annually. So I will take 7% as the base nett return.
Other assumption including the services fees which is charged at average 2% and current default rate which is 1%.
So total expected yield is 7% + 2% + 1% = 10% gross yield. (Ideal for breakeven)
However, I expect the default risk will grow to 2% in near future and I would like to have a safety factor of 2. 2% risk vs 2 % gain rule.
Hence, I expect the gross return to be 7% + 2% + (2% x 2) = 13% gross yield.
As of my current portfolio, 13% - 2% service fees - 1% default (my actual default rate is in-line with FS default rate) = 10% nett yield.
The way I maintain the default rate to be minimum is to heavily diversify by using following diversification matrix.
Another approach to protect my 10% nett yield is the compounding effect by taking the notes that offer equally monthly repayment schedule. Taking effective interest rate is 1.5 times the simple interest rate. = 10% x 1.5 = 15%.