Difference Between P2P and Mutual Funds: Which is a Better Investment Option?

Tanya Verma

16 Jul, 2019

You definitely must be looking for an option to invest in order to save money for the future. This blog will provide with all the information regarding P2P and Mutual funds. You can gather information about them and choose accordingly which investment option is suitable for you.

What is P2P Lending?

P2P Lending or Peer to Peer lending is the action of providing lending to suitable individual or businesses through online platforms. Since these companies generally operate online so, they have lesser expenditure than companies running offline. Hence, they are able to provide services at a price lower than traditional financial institutions and they earn higher returns.

As a result borrowers are able to borrow money at lower interest rates even after adding the fees charged by the lending company. But P2P lending is unsecured personal loans and they are often issued after keeping a precious item of borrower as collateral. The borrower can be an individual, company or charity, etc.

Other forms of P2P lending are;

• Student loan
• Commercial and real estate loan
• Payday loan
• Leasing
• Factoring
• As well as secured business loan

How P2P Lending Platforms are Regulated?

In India the Peer-to-Peer lending platforms are regulated by The Reserve Bank of India {RBI}. They work in the interest of lenders and borrowers and formulate rules to protect them. From October 2017 all p2p lenders need to mandatorily have a license to continue their businesses according to rule of RBI. The cap set by RBI for investment by lender is Rs. 10 lakhs and for a borrower is Rs. 10 lakhs.

Procedure to Start P2P Lending and Borrowings

Peer-to-Peer lenders and borrowers both need to be registered to start lending or borrowing by paying the non-refundable registration fee of Rs. 100-1000. The documents required for the registration process are as follows;

• Scan copy of any ID proof such as;
  • Driving license
  • PAN Card
  • Passport
• Salary slip of last 3-6 months for salaried individuals
• Copy of income tax return

Lenders may access information from various social media profile of the borrower for evaluating data points such as profile, social behavior, job stability, etc. providing social media information is not mandatory by giving that information the changes of getting the loan increase.

If You Need P2P License Please Contact Enterslice

Key Factors to Check before Investing on P2P Lending

The factors lender must check while registering on the P2P lending platform are;

• Credibility of these platforms
• Ease/simplicity of lending on these platforms
• The defaulter rate on that website

Interest Rates for Borrowers in P2P Lending

P2P lending platforms provide loan on a interest rate ranging from 10.99 percent to 36 percent. Based upon the credit profile and needs of the borrower. Also, the interest rate varies from company to company providing lending. These platforms charge processing fees of 3-5 percent from borrowers and investment amount from lenders after receiving the last EMI from the borrower.

Advantages and Disadvantages of P2P Lending

The benefits of P2P lending include;

• Simple process
• Minimum lending amount starts from Rs. 5000
• Lending platforms provides lenders with analysis of the borrower’s social background
• It is regulated by RBI

The drawbacks of P2P lending include;

• Lenders loose capital in case of a defaulting borrower
• Lenders may lose capital in case lending platform shuts down
• They may lose money due to rising bad debt
• It is unsecured personal lending

List of P2P Lending Platforms in India

Top 10 Peer-2-Peer lending platforms in India are;

• Lendbox
• Faircent
• Lendingkart
• Finzy
• i2iFunding
• i-Lend
• LenDenClub
• PaisaDukan
• RupeeCircle
• Monexo
• Cashkumar

What are Mutual Funds?

Mutual funds are professionally managed investment platforms/institutions that collect money from various investors and invest them on their behalf. They use this money to purchase securities. Investors can be institutional or retailer in nature.

• Open End Funds: it is a type of investment scheme that can provide or redeem shares at any point of time
• Closed-End Funds: it is a type of investment scheme that issues a fixed number of shares that are not redeemable. It is the exact opposite of Open-End Funds
• Unit Investment Funds: is an investment company that offers fixed portfolios. They generally are redeemable stocks and bonds issued to investors for a specific period of time.

How are Mutual Funds Regulated?

The Securities and Exchange Board of India {SEBI} regulates the Mutual Funds in India under the Mutual Fund Regulations, 1996. The main objective of SEBI is to protect the securities of investors and to promote the development of these funds. It also regulates the security market.

How to Start Investing in Mutual Funds?

If you are new to mutual funds then keep these points in mind before investing;

• Define your goal in terms of objective, budget and the tenure you can invest for
• Choose the right type of fund to reduce risks associated with it
• Shortlist funds which has performed consistently well for at least five years
• Try to invest in more than one but not more than three at the beginning to even out the risks
• Keep your KYC documents updated
• If you want to invest in mutual funds you need to have an internet banking account; so keep it ready
• Seek for help for experts

Procedure to Invest in Mutual Funds

If you want to invest in mutual funds follow these steps;

• Register on any platform providing mutual fund
• Enter details like amount of investment and its tenure
• Get your KYC done
• Follow other steps specified by that platform

Advantages and Disadvantages of Mutual Funds

The primary benefits of mutual funds are as follows;

• They provide economies of scale when investing with a group
• Also, they furnish higher level of diversification by providing access to wider variety of investments
• These funds are more liquid because they are less volatile; i.e. they are less liable to change rapidly or unpredictably
• They provide professionally managed services to investors
• They help the investors by providing an option to contribute monthly

Its disadvantages include;

• Investors in a mutual fund has to pay various fees and expenses
• The income can be less predictable
• There is no option to customize

To Conclude

This blog provides you with all the information you need to invest in peer-to-peer lending platforms or in mutual funds. Now you need to decide for yourself which one is better for you. According to the amount you are investing and the kind of output you want. We hope this blog can help you the next time you invest your hard earned money anywhere.