08/07/2023 | 4 Comments

In a world where expenses keep rising, wealth creation is on everyone’s mind; and for those that it is not, it should be, since a financially secure future is everyone’s right. Considerably, there are a wide range of investments individuals can choose from today. These can be categorised as traditional investments and non-traditional investments. Traditional investments include fixed deposits, gold, and bonds, while non-traditional investments include P2P investing, cryptocurrency, and equity/angel investing.

In this article we explore the pros and cons of both approaches and the implications of factors such as diversification, investment returns, transparency, liquidity, and risk and return. By comparing both P2P investing and traditional investments, investors can make informed decisions that are aligned with their financial goals and preferences.

Pros and Cons of P2P Investing

Pros of P2P Investing Cons of P2P Investing
Alternative Investment: At its core, P2P investing provides a platform for individuals who wish to invest outside of traditional markets, such as stocks, bonds, real estate, thereby expanding their investment opportunities. Risk and Return: Higher the risk, higher the reward; this statement sheds light on the higher risk associated with P2P investing considering the above-average returns it offers. In a nutshell, the risk-reward ratio with P2P investments is quite high compared to traditional investments.
Diversification: By diversifying their P2P investment portfolio, investors can mitigate the impact of any individual defaults. Limited Regulatory Oversight: Considering its nascency, P2P investing is prone to evolving regulatory constraints. Akin to traditional investments, investors must conduct due diligence to mitigate risk.
Investment Returns: Among the available investment avenues, especially those in the traditional category, P2P investing offers the potential for significantly higher returns. Lack of Collateral: Since P2P loans are unsecured in nature, it may increase the risk of potential losses. Due to any changes in borrower behaviour, be it personal reasons or market sentiments, investors may face occasional defaults.
Transparency: P2P platforms ensure complete transparency via detailed borrower information and borrower credit rating, in addition to the loan details, thus giving investors complete control over their investment decisions. Limited Historical Data: Considering the fact that P2P investing is a relatively new investment option for Indians, historical performance data may be limited, making projections challenging.

Now that we’ve gone over the pros and cons of P2P investing, let’s understand the same for traditional investing.

Pros and Cons of Traditional Investing

Pros of Traditional Investing Cons of Traditional Investing
Diversification: With access to a wide range of asset classes such as real estate, bonds, stocks, and mutual funds, traditional investments allow investors to diversify their portfolios to the max. High Entry Barrier: Some traditional investments have high minimum investment requirements, which limits access for smaller investors.
Investment Returns: These investments offer the potential for long-term capital appreciation and wealth creation depending on the asset class and investment strategy. Market Volatility: Since they are quite exposed to the markets, traditional investments are prone to volatility, and returns can fluctuate.
Transparency: Traditional investments operate within established regulatory frameworks, ensuring transparency and accountability. Lower Flexibility: Traditional investments often have longer lock-in periods, making it less flexible for investors who require immediate access to their funds.
Liquidity: Some traditional investments such as stocks and bonds offer high liquidity which allows investors to buy/sell their investments easily. Complexity: Traditional investments can be complex, requiring a deeper understanding of market dynamics, asset valuation, and investment strategies.
Risk and Return: Traditional investments offer a range of risk and return possibilities, thereby allowing investors to choose investments that align with their risk tolerance and financial goals. Higher Costs: Traditional investments may typically involve higher fees and expenses, including brokerage fees, management fees, and transaction costs. These expenses can eat into investment returns.
Regulatory Protection: Traditional investments are subject to established regulations that are designed to protect investors’ interests. Limited Control: Investors have limited control over the underlying assets (which support the investment) or decision-making processes.

What we can gather from the above is that P2P investing is an alternative investment avenue that offers potentially higher returns compared to traditional investments. Investors must evaluate their financial goals, risk tolerance, investment preferences, and the benefits they wish to derive from their investments. A well-diversified portfolio should include a mix of both P2P investments and traditional investments.