By Jessica Wee
A lack of cash is one of the biggest stumbling blocks for new investors.
It can be tempting to put off investing to some undefined point in the future – until one has saved up a tidy sum. However, starting early allows budding investors to benefit from compounding interest, and to seize time-sensitive opportunities, among others.
Thanks to a growing range of easy-to-use investment solutions (in the form of apps and lower entry cost!), investors are now finding it easier than ever to start building their nest eggs for the future through fractional investing.
Fractional or bite-sized investing has been gaining traction in the last few years. At least in Malaysia, it started with P2P lending companies eg: Funding Societies, Fundaztic, CapitalBay etc.
P2P lending is when investors lend money to individuals and businesses through online platforms. This allows borrowers to obtain loans without having to go through the strict requirements of banks which makes the process easier and faster.
P2P lending generally promises higher returns than traditional investments, but investors take on higher risk as well. Like traditional financial institutions, P2P lending platforms calculate interest rates based on the risk profile of the borrower.
Reasons to consider investing via P2P lending?
High returns. Your return on investment with P2P lending can range from 10% to 18% while other traditional investments only provides a return which includes unit trust only provides single digit returns.
Monthly returns. With P2P lending, you’ll generally start receiving monthly repayments a month or two after your initial investment. Who doesn’t like a monthly payout?
Low initial investment. You need as little as RM50 to RM100 to start investing in P2P lending, although some platforms may require an initial RM1,000 initial.
Control. You have direct control over which businesses to invest in. Don’t want to invest in education-related businesses, or only want to invest in Shariah-compliant businesses? It’s your call unlike investing in a public listed company.
Reasons for not investing via P2P lending?
High risk. Businesses who apply for loans with P2P lending platforms tend to be startups or small businesses that aren’t well established. These businesses have lower credit ratings that make them ineligible for bank loans. The company that is pressed for money will be agreeable to high double-digit interest rates!
When you invest with P2P lending platforms, you’re exposing yourself to higher credit risk, so be prepared for the possibility that a borrower will default on their loan. However, this risk can be mitigated if you choose to invest only in lower risk companies in the P2P lending platforms.
You could lose your entire principal. If borrowers default on their payments, you could lose the principal you have invested. Some platforms may take legal action against borrowers or work with them to propose alternative repayment solutions. Even so, your repayments are not guaranteed as you are an unsecured creditor.
Here are other fractional investment ideas:
Gold – instead of buying an entire gold bullion, you may invest from as little as 1g paper gold.
Real estate investment trust aka REIT – allows you to invest fractionally and participate in the rising value or the property and rental returns without having to own the physical property
Horse ownership – starts from 0.025% share of a racehorse without the need to incur hefty traditional price tag that comes with owning a racehorse. Find out more
Fractional investments are expected to garner wider attention and adoption in 2022 as people become aware of the transformations that technology is enabling in the personal finance industry.