P2P is nowhere near as developed as other types of investment and in its pure form it is still the preserve of the confident and knowledgeable. Using a fund manager can make senseby Andy Davis / April 23, 2015 / Leave a comment
The choice of places where DIY investors can put their money has grown in some interesting directions since our economy hit a wall. There is now a recognised “alternative finance” movement that distances itself from the old guard, in much the same way alternative comedy in the shape of The Young Ones and Harry Enfield usurped the throne previously occupied by middlebrow troopers such as Des O’Connor and Little and Large.Whether the alternative finance upstarts will displace the incumbents is far from clear, but that is not the primary concern for DIY investors. It is more important to understand that new ways to create returns on your money, particularly peer-to-peer (P2P) lending, are moving gradually closer to the mainstream and that the best of the companies offering these options are developing a credible record of balancing risks and returns.In essence, P2P lending involves matching those with money to companies or individuals that want to borrow, via an online marketplace. The Financial Conduct Authority authorises and regulates the websites that broker these loans, and to date well over £1bn has been lent, predominantly by individual investors, to consumers and small businesses via online operators such as Zopa, Ratesetter, Funding Circle and Thincats. With typical returns ranging from 5 per cent to 10 per cent, and minimum loan sizes of as little as £20, it is hardly surprising that the popularity of P2P lending among individual investors is now growing rapidly, given what they can earn from (admittedly much safer) sources such as deposit accounts.
Lending your money in this way carries all sorts of risks—the borrower might default; you might not be able to get your money back early if you need it. Also, these operations are still very young and do not yet have enough of a history to be sure how their loans will perform under all circumstances. However, to date the returns have looked attractive and losses on default have been modest.
The practical problem for investors who want to profit from the yields available on P2P lending has so far been that achieving genuinely diversified exposure is hard work. Individual P2P websites specialise in different…