137 In P2P Financing (or any investment), diversification is key to minimize loss

In P2P Financing (or any investment), diversification is key to minimize loss

In my previous articles, I shared my participation in two of the six approved P2P Financing companies. I also shared I used auto invest and limit my investment amount and time frame. My idea is to diversify, and to try to minimize the potential loss caused by any default. To me, this is a high risk investment — we just won't know when things will go wrong.

Well, yesterday I received an email newsletter from a famous blogger. He shared his first loss in Funding Societies — the largest P2P Financing company in Malaysia. He has been with Funding Societies for quite some time, and has been earning 10+% of interest.

Then suddenly, he received email from Funding Societies that one of the loan could default. This loan is for a period of one year. The first one or two payments were on time, but the subsequent two or three were late or not received.

After reading the email, actually it could only be categorized as a potential loss only. Funding Societies has met up with the borrower and has reached agreement to restructure the loan repayment. The borrower borrowed in anticipation of a business grow, but did not materialized. Businessmen planned for potential expansion but future is always uncertain.

The blogger gave some advice on how to know the background of loan and the borrower. On top of all, his advice is diversification is the way to reduce loss. After all, Funding Societies' statistics showed their default rate of their loans is only slightly above 1% and lower than 2%.

When we come to investing style, there are always arguments of concentration and diversification. Both camps has their success stories to tell. The famous value investors Warren Buffett and Charlie Munger practiced concentration. Their money are all in Berkshire Hathaway, and Berkshire Hathaway has its money in few stocks only.

However, for small investor like us, I think we should we should practice diversification. We do not have the time and knowledge to study our investments. If I put my money in one stock, and it goes with the wind, it would be disastrous for me and my family. We may not have the time to regain the loss.

When Warren Buffett closed his first partnership way back in 1970s, he asked Bill Ruane to take our his partnership since some of his investors wanted to stay invested in stock market. Bill started Sequoia Fund, and practiced concentration. The fund performed well because of the stock selection but it also suffer loss because of concentrating on the wrong stocks.

Today, we have many type of investments, and within each investment, there are so many companies to choose. We do not know which will do well in which market cycle, so our best bet is to put some here and some there.

In Malaysia, there are few stocks like Public Bank, Digi or Genting that has proven to bring wealth to their shareholders. In those stocks, bought them, forget them, and you are rich. But when they we first listed, nobody knows they are wealth creator,  just like nobody knows Berkshire Hathaway will be the greatest investment company.

Coming back to the P2P Financing, it is a new investment industry for small investors — the maximum investment per person is RM50,000. Six companies are available, we can put some money into few of them, and further spread our money into more loans.

Luckily, the blogger's exposure in the default loan is only a small fraction of his total investment. Otherwise, he may suffer great loss and many sleepless nights.

With diversification in mind, I chose two companies that provide short term loans. I am not ready to lend to long term borrowers.

Funding Societies has both long and short term loan but I set auto bot to participate in short term loans only. B2B Finpal only loan to short term borrowers. I set the investment to even shorter period.

If you too want to diversify some money into B2B Financing, you may consider them. All the two companies provide referral scheme. And mine are

Funding Societies:- http://promo.fundingsocieties.com.my/referral-program/?r=jjqsmwav

Funding Societies rewards the introducer and investors with RM50 when investor sign up and invest a minimum of RM1,000. So it benefits both of us.

B2B Finpal :- Put IN001029-Teo Soon Ann in the last column Referral Code when doing registration at https://prod.b2bfinpal.com/investor/registration.

136 B2B FinPal — my second P2P lending company

B2B FinPal — my second P2P lending company


After I joined my first P2P lending company  —  Funding Societies, I surveyed other P2P lending companies. I get to know Funding Societies has the biggest market share, followed by Fundaztic and B2B FinPal.

Actually, Fundaztic is the second company I joined but I did not put money into it. This is because Fundaztic needs RM2,000 to have auto-investment facilities. And I do not want to put that much. Another thing is Fundaztic's lending are longer term — up to 2 or 3 years. I also do not want to lock my money that long.

(Auto-investment is a function where we as investors put our criteria into their system. When an opportunity that meet our criteria appears, lending company will help us to bid for the opportunity. Without auto-investment, investors can always select manually.)

Then after that I surveyed B2B FinPal. They need RM1,000 for auto-investment and their lending are very short term (mostly I see 2–3 months). This short lending period gets me interested. I set the minimum investment amount for each lending to be RM100. If each lending can give me 0.5%–1% net interest per month, it's very good for me — consider that I get almost nothing in savings account.



Registration

Funding Societies and Fundaztic are easier to open account. Simply fill up the online form. For Funding Societies, wait few days for them to activate the account. For Fundaztic, they will bank in a random amount of money into our savings account as verification code. For B2B Finpal, we need to print out and complete their agreement.

(I think Funding Societies has improved their registration process. My mentor told me he had to print out the agreement as well.)



Lending

After joining those P2P lending companies, I realized that so many SME need funding. Some need big amount, some small, some longer term, some very short term. I think each P2P lending companies has positioned themselves in the area they want to be.

Funding Societies has both short term (3 months invoice financing opportunity) and long term (1-2 years business term financing). Fundaztic is mostly longer term (above 2 years) financing. B2B FinPal short term financing only. Of course, shorter term financing comes with lower interest rate.

I received emails everyday from, almost all three companies, about lending opportunities for me to consider. This is such a big market. P2P lending companies must be a great help to them. At least better than going to Ah-Long funding. ^_^

I think by this rate of lending opportunities, minimum investment amount of RM1,000 will be used up very soon. About a week or two in Funding Societies, about RM400 has been allocated for lending.



Fees

All three companies do not charge account opening fee. However, please note the platform fee (or the fee charged from repayment or sharing on interest received). Funding Societies has a low platform fee. B2B FinPal platform fee (sharing rate) is actually quite high. That said, B2B Finpal offered undeniably me an opportunity to get interest rate higher than conventional savings account.



Never forget — Risk

Although P2P lending is regulated in Malaysia, and each licensed companies has their set of lending criteria, I see it as a high risk investment because the creditor can possibly default. The default rate is perhaps very low, but we should not perceived it to be low risk. "Low default does not mean no default". That's why I do not want to lock my money for long term.

In investment, never forget "high risk, high return". In equity investment, we always aim for 8%–10% type of compound return. In P2P lending here, I see the interest rate can 10% or 15% per annum, so it must be of higher risk. So, I want to control each participation to the minimum requirement (RM100), and shorter term lending.



Referral Scheme

All the three companies provide referral scheme. And mine are

Funding Societies:- http://promo.fundingsocieties.com.my/referral-program/?r=jjqsmwav

Fundaztic:- https://p2p.fundaztic.com:443/generalize/regist?member=e1hvJ8%2Fctu1o9eb9s9%2FZXA%3D%3D,

B2B Finpal :- Put IN001029-Teo Soon Ann in the last column Referral Code when doing registration at https://prod.b2bfinpal.com/investor/registration.



Last word

Never forget to go for regulated investment scheme only. And the company must be licensed. I am glad many investment schemes in Malaysia are regulated. So many scams has happened in Malaysia, and so many innocent investors lost a lot of money.

With that, my exposure in P2P lending is consider complete. What follows is the monitoring process of each companies operation, opportunities, and most importantly the default rate.

135 Funding Societies—my first investment in P2P financing company

Funding Societies—my first investment in P2P financing company

Peer-to-Peer (P2P) financing is a new type of investment approved by Securities Commission Malaysia in 2016. Meaning it is a regulated investment scheme in Malaysia. All these while, our investment vehicles are mainly built around bank deposits, bonds and equity. Since we see volatility in stock market, some investors may like to diversify into other investment vehicles.

Investopedia defined P2P financing as:
Peer-to-peer (P2P) lending is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but it also involves more time, effort and risk than the general brick-and-mortar lending scenarios. P2P lending is also known as social lending or crowdlending.

The first time I get to know P2P financing and equity crowdfunding was during a MFPC seminar in 2017. At that time, I remember Crowdo, FundingSocieties talked about how these types of investment works and how investors can potentially benefit. But I did not invest into it because they were relative new and I am a bit uncertain. After all, I am a timid investor.

The stock market is quite volatile since beginning of 2018. I started to look into other alternative investment vehicles. My mentor, who invested in P2P during the mentioned seminar, said the P2P he invested is giving quite consistent regular income. So, he recommended me to Funding Societies.

Funding Societies is one of the six registered P2P lending company. It claims to be one of the biggest in the industry.


Opening Funding Societies account

Opening a Funding Societies account is relatively easy. I only have to click the referral link my mentor sent to me. Then I simply have to fill in the required info, upload my NRIC, and also bank in minimum RM1,000 for investment purpose. The website said the process should take 2 working days for their approval. In my case, it took me about one week.

After account being approved, I log in to setup auto investment system. I have to choose the lending type, the tenure of lending, the interest rate I want, and the industries of lender.

In term of lending type, I can choose Business Term Financing and Invoice Financing. Business Term Financing lends to business that need funding for further expansion, the tenure is range from 1 month to 18 months. Invoice Financing lends to business that sell their future receivables or invoices to get immediate cash; the tenure is between 30–90 days. Well, I chose both.


The first investment

The auto investment kicked in when there is one opportunity yesterday (Aug 1). For this investment, the amount of RM100 is the minimum investment amount I preset. I remember the speakers said it is better to diversify, because a business can still fail or default on payment.

So, for this first investment, I have to monitor the how is the return. If everything goes well for the next 12 months, this financing will give me simple interest rate of 14% while the effective interest rate is 25%. To me, that is very high.

I am looking for seeing more financing opportunities. If the default is low, I can invest more. I am also eager to see how the account can grow.


Referral Scheme

I join Funding Societies on my mentor's referral, both of us will get RM50 when RM1000 is invested. Nice right? Likewise, I can refer friends to join Funding Societies — for me and friends to enjoy RM50 referral fee. My referral link will be

http://promo.fundingsocieties.com.my/referral-program/?r=jjqsmwav


Note: on Aug 2, 2018, LendingStar was issued Cease Order by SC because the firm was not registered to operate a recognised market, and was providing auto-invest facilities without licence or registration.