P2P Lending
P2P lending, exemplified by platforms like Monexo, connects individual borrowers with investors online, bypassing traditional financial institutions. Monexo offers the potential for higher returns, with interest rates reaching up to 13%, significantly outpacing traditional FDs. The platform allows investors to diversify their investments across multiple loans, reducing the risk associated with any single borrower’s default. Moreover, P2P lending offers flexibility in terms of investment amounts and liquidity, although it comes with its set of risks, primarily credit risk.
NBFC Deposits
NBFC Fixed Deposits offer competitive returns, typically higher than regular bank savings accounts. Investing in AA+ rated Non-Banking Financial Companies (NBFCs) like Bajaj Finance Ltd, HDFC Ltd, and Shriram Finance Ltd, provides a combination of safety and attractive interest rates due to their strong creditworthiness. For example, Bajaj Finance offers interest rates up to 7.65% for a 5-year term, which is considerably higher than many bank FDs. These FDs come with flexible tenure options, ranging from 12 to 60 months, allowing investors to align their investment durations with their financial goals.
Comparative Analysis
| Feature | Monexo ( P2P Lending ) | Bajaj Finance Ltd. (NBFC FD) | Sundaram Finance ( NBFC FD) | Shriram Finance Limited ( NBFC FD) |
| Interest Rate | Upto 13% manually | Upto 7.65 % for 5 years | Upto 7.75% for 5 years | Upto 8.18% for 5 years |
| Investment Period | 12 to 36 months | 12 to 60 months | 12 to 36 months | 12 to 60 months |
| Risk level | Moderate | Low | Low | Low |
| Minimum Investment | ₹ 10,000 | ₹ 25,000 | ₹ 10,000 | ₹ 5,000 |
Analysis
Returns:
Monexo offers significantly higher potential returns compared to the NBFC FDs listed, which is reflective of the higher risk associated with P2P lending. The NBFCs offer more stable and predictable returns, albeit lower, which are more suitable for risk-averse investors.
Investment Period:
Monexo provides flexibility with shorter minimum investment periods as well in comparison to most NBFC FDs, which might appeal to investors looking for shorter commitment durations.
Liquidity:
Monexo offers moderate liquidity through secondary market platforms, whereas NBFC FDs generally incur penalties for early withdrawal, making them less liquid but suitable for investors who do not require immediate access to their funds.
Risk:
The risk is higher in P2P lending due to the reliance on individual borrower’s creditworthiness, whereas NBFC FDs carry lower risk as they are typically asset-backed and regulated.
Minimum Investment:
Monexo may allow for smaller initial investments starting from ₹10,000 rupees , Making it accessible to a broader range of investors compared to the higher minimum thresholds often required by NBFC FDs.
Is investing in P2P better ?
Higher Potential Returns
P2P lending typically offers higher interest rates compared to NBFC fixed deposits. While NBFC deposits provide a stable and predictable return, P2P platforms can offer returns that often exceed those of traditional fixed deposits, sometimes reaching as high as 13% or more annually. This higher yield potential makes P2P lending attractive for those seeking to maximize their income from investments, provided the investor has to continously invest the principle repayments collected from the borrowers.
Diversification Opportunities
P2P lending allows investors to diversify their portfolio beyond traditional asset classes. By investing in a variety of loans with different risk profiles, durations, and borrower demographics, investors can spread their risk across multiple channels. This level of diversification can be particularly advantageous during times of stock market volatility or when traditional fixed-income returns are low.
Active Investment Management :
P2P lending gives investors the opportunity to actively manage their investments. Investors can choose specific loans to fund based on detailed information about the borrower, the purpose of the loan, the risk category, and expected returns. This hands-on approach contrasts with the passive nature of fixed deposits, where funds are simply parked for a specific duration with a fixed return.
Economic and Social Impact :
Investing in P2P loans can also have a social dimension; many investors feel a sense of contribution by directly supporting individual borrowers or small businesses that may not have easy access to traditional banking services. This aspect of P2P lending can be appealing for socially conscious investors who want their money to have a direct positive impact.
Flexibility in Terms and Liquidity
Although P2P loans typically lock in your funds until the borrower repays, some platforms offer secondary markets where loans can be sold to other investors. This feature can provide greater liquidity compared to fixed deposits, where early withdrawal might come with penalties or reduced interest rates. Additionally, P2P platforms often allow investors to choose both the amount and the term of their investments, offering flexibility not always available with fixed deposits.
Potential Tax Advantages :
As mentioned earlier, P2P lending might provide additional tax benefits such as the possibility to deduct losses from bad loans against other investment income. This feature can make P2P lending more tax-efficient compared to fixed deposits, where the interest income is taxed at the marginal rate without opportunities for deductions in case of losses.
Considerations and Risks :
It’s important to note that with higher potential returns come higher risks. P2P lending involves credit risk, and there is the possibility of borrower default. However, many P2P platforms mitigate these risks through credit analysis, risk assessment technologies, and by offering loan diversification to minimize the risk.
Minimum Investment: Monexo may allow for smaller initial investments starting with as low as ₹10,000, making it accessible to a broader range of investors compared to the higher minimum thresholds often required by NBFC FDs.
Interest Income Taxation
Interest earned from both P2P lending and NBFC fixed deposits is taxed at the individual’s marginal tax rate, categorized under “Income from Other Sources.” However, P2P lending may offer slightly more favorable conditions for tax planning. Investors in P2P lending might use certain permitted deductions within the ambit of legality to potentially reduce their taxable income. In contrast, interest income from NBFC fixed deposits does not benefit from similar deductions, making the tax treatment generally less flexible compared to P2P lending.
Tax Deductibility of Losses
P2P lending offers the unique advantage where investors may deduct losses due to loan defaults from their taxable income, potentially reducing their overall tax liability. This deductibility aligns with the treatment of bad debts in many tax jurisdictions. However, for NBFC fixed deposits, losses incurred from defaults or write-offs are generally not deductible for individual investors. This is because fixed deposits are considered a low-risk investment, and defaults are rare and usually covered by deposit insurance up to a certain limit.
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Overall, while both P2P lending and NBFC deposits offer potential tax-saving opportunities, P2P lending may provide more flexibility in terms of tax treatment, deductions, and reporting. Investors should consult with tax advisors or financial professionals to understand the specific tax implications of each investment option and optimize their tax strategy accordingly.
Embark on your investment journey with P2P lending through Monexo and capitalize on the potential for higher returns. With personalized risk diversification and a user-friendly platform, it’s an attractive alternative to traditional deposits.
Ready to start? Dive into Monexo’s P2P lending today for a modern approach to growing your wealth.
