Interlude: What I learnt from investing in P2P financing

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 28, 2017 - September 03, 2017.
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Many years ago, the only way for people like me to invest in the debt market was through unit trust funds. The minimum initial investment amount for bond unit trust funds is usually RM1,000 and online platforms such as often charge an annual management fee of about 1%.

However, the emergence of peer-to-peer (P2P) financing platforms has opened up new opportunities for investors. The benefits are obvious. The minimum initial investment amount can be as low as RM50 and the annual fee is 1% to 2%. In fact, the motto of one of the platforms is “Now, everyone can invest”.

So far, the annual return (excluding fee) has ranged from 5% to 13%, according to the investment notes posted on the three licensed P2P platforms that have already been launched in Malaysia. That is definitely higher than fixed deposit rates and could be higher than some of the bond unit trust funds. 

Yes, investors are taking on more risk for higher returns. But the platform providers say the risks can be mitigated if investors diversify into different investment notes. I agree with their view. As the saying goes, “Don’t put all of your eggs in one basket”. It sounds boring, but it rings true even today. 

I started my investment journey in P2P financing in March. At the time of writing, I had RM8,000 in five investment notes and had received all payments from all the issuers on time.

Based on the information provided by the platform I invested in, I also received RM134.14 in interest and incurred a service fee of RM24.88. This equals to a return of 1.6% over six months. 

However, this is not the total return of my portfolio as I invested in five notes at different times in the past six months. Thus, I have yet to receive some of the payments.

I have learnt a few things on this investment journey that I believe can be pretty useful for those who have yet to invest via these P2P platforms.

1. Know the platform operators

I have found that I am more comfortable investing in such platforms when I know who the operators are and their backgrounds. I have to say that I am fortunate to have met them face-to-face during my assignments as a journalist and had the chance to ask them difficult questions. 

But investors can do it too. Subscribe to their websites and get notified when they hold seminars. Here, investors can meet the platform operators and ask them questions. 

2. Know the registration process 

Some platforms make it convenient to register online while others require documents that have been manually signed. Investors have to download the documents, print them out and sign them before sending them back to the operator. 

3. Know the depository process 

Some platforms require investors to deposit a minimum amount in a trust account while others do not. For those that require a minimum amount, investors need to place a large sum, say RM1,000, in a trust account that the platform operator has access to. This is needed despite the low minimum amount for each investment note on the platform, which could be as low as RM100. 

For platforms that do not require investors to deposit  a minimum amount, the investors can make an FPX (financial process exchange) payment whenever they want to participate in an investment note. The money is transferred from the investors’ bank account to the trust account. 

This requirement matters because if investors have to place a large sum of funds in a trust account, the money could sit idly there for some time without generating any returns. While investors can withdraw unused funds from the trust account within a day or two, it is a bit of a hassle in my opinion. 

4. Know the charges on repayments

In some cases, investors should take note that the simple interest rate quoted to them does not take into account some of the fees charged, such as the 1% to 2% charge on each payment made by the issuers of the investment note. For instance, an investor who places RM1,000 in a 12-month investment note with a simple interest rate of 10% receives one-twelfth of the principal plus interest each month, which is equal to RM91.66 (RM83.33 + RM8.33). 

Assuming that the platform charges 2% for each monthly payment, RM1.83 (out of RM91.66) goes to the platform each month, or about RM22 over 12 months. After deducting the fee, the total return over 12 months is RM78.04 (RM100 - RM21.96), which equals a return of 7.8% instead of 10%. 

The example above is for illustration purposes only. The fees vary depending on the platform provider and the tenure of each investment note. 

5. Know that you are taking a higher risk for a higher return

One of the platform operators said in a recent article that companies that are able to provide good financial statements could default on their loans as well. This could be due to the companies taking on more debt after taking the loan and failing to make payment on its debts, or borrowers failing to collect money owed to them by their clients.