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

Dear Readers

Just the other day, I was posed a question regarding what is an appropriate amount an investor should invest in an investment note/loan.

p2p financing

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.

Operator’s restriction

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.

Calculation

(9 remaining notes x RM100.00 return per note) – (1 defaulted note x RM1,000.00)

RM900.00 – RM1000.00

-RM100

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.

Calculation

(19 remaining notes x RM50.00 return per note) – (1 defaulted note x RM500.00)

RM950.00 – RM500.00

+RM450.00

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.

Conclusion

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.

Promotion

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.

Helpful links

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**This article is written in association with Funding Societies Malaysia.**

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