Which is the best option to invest money?

By: People Lend0 comments

Investment is an integral part of a financially secure life today. With rising inflation rates, cost of living and improving lifestyles, most of our dreams and aspirations need the fuel of money. After all investment is all about making your money work equally as hard as you do to generate wealth. There are many options available for you to invest your money like fixed deposits, stocks, mutual funds, peer to peer lending, etc. However, finding the best option to invest money depends on a wide range of parameters which can be different for each one of us.

Before you start investing…
Most successful investments are based on three important pillars which can help you determine your investment profile:

  1. Financial goal
  2. Risk Preference
  3. Time horizon of investment

Before you start investing, it is important that you list down the financial goals that you wish to achieve through the investment. Are you planning to buy a house or get married or are you investing for your retirement fund or your children’s higher education? Having a clear financial goal (s) can help you determine the best investment option that can be instrumental in fulfilling your dreams.

Also, how comfortable are you with risks? To quote Warren Buffet, “Unless you can watch your stock holding decline by 50% without being panic-stricken, you should not be in the stock market.” In simpler words, you should invest in options that are synchronous with your risk preference.

Finally, some investment options, like real estate, have a long investment lock-in before fetching good returns. By being clear about your investment horizon, you can choose the options that fit into the period you have in mind.

Types of Investment Options
Another aspect that you need to understand is the various types of investment options available to you. Without getting into too many details, here is a quick laundry list of the investment options available in India today:

  • Real Estate
  • Gold
  • Stocks
  • Mutual Fund
  • Peer to Peer Lending
  • Fixed Deposits
  • Bonds and Debentures
  • Commodities
  • Public Provident Fund
  • Insurance policies
  • Post Office Savings Schemes, etc.

While each one of them can help you create wealth, they are all inherently different products with their own set of associated risks. Remember, all investments have some amount of risk associated with them. And, a good investment option is the one that helps you generate wealth by taking risks commensurate with your risk preference.

Look at which option syncs with the three pillars described above. This should help you determine a shorter list of options that you can consider. Next, do some research and look for options that are more reliable and the ones that you understand better. To quote Paul Clitheroe, “Don’t invest in anything that you don’t understand. Do your research first.”

Most investment options are subject to market risks, or their performance is affected by the way the market performs. So, if the stock market experiences a drop, then chances are that your portfolio might decrease in value too. In such a landscape, an alternative option for investment has evolved in recent years – Peer to Peer Lending.

Peer to Peer Lending
Peer to Peer Lending offers you an opportunity to be a Retail Investor and lend funds to Retail Borrowers without the intervention of a bank. Traditionally, banks would take deposits from people at low interest rates and offer loans at relatively higher rates. With P2P platforms, there is no bank in the equation giving you an opportunity to earn up to 30% returns. Also, since your money is not invested in the market, your portfolio is unaffected by volatility of the market. Here is how it works:

Investor ->Connects with borrowers through P2P platforms ->Lends funds to borrowers ->Earns a higher rate of interest depending on the risk involved

Borrower -> Can apply for a loan even if the CIBIL score has been adversely affected for some reasons -> Pays interest proportional to his/ her credit score.

Here are some benefits of investing through P2P Lending platforms:

  • Since you are lending money to a borrower at an agreed rate of interest, your returns are not dependent on the performance of the market.
  • You can choose to invest in five types of risk classes and earn returns ranging from 11-30% on your investments.
  • No more need to monitor the performance of your investments since their value does not change on a daily basis. You receive the instalments on a fixed date every month. If you plan on reinvesting it, then you will need to log in to the platform once every month.
  • Most platforms have a delay or default handling process in place. Ensure that you understand this process before investing.
  • Most P2P platforms offer a double-diversification option wherein you can first determine the spread between the five risk classes (from low-high) and then choose 10-20 different borrowers within each risk class and divide your funds among them. This brings your risk exposure down to a great level and acts as an effective hedge against the risk of default.

Summing up
There is no ‘best’ investment option that is true for all investors. After all, ‘one man’s food can be another man’s poison’, right? Ensure that you research well and choose the option that best suits your investment profile. Good Luck.

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