What is Diversification?
Defaults are inevitable in debt investment lending. Our thorough credit assessment is one way we reduce the risk of defaults.
The simple interest rates on each listing is an indicator of the credit risk of the SME. The higher the interest, the higher the credit risk, which is summarised in the fact sheet that is published along with each listing.
There are various strategies that our investors have used to diversify.
Minimum amount into each and every note
Some investors prefer to invest the minimum amount possible into each and every single note. This way, even if one note were to default, the principal amount lost would not impact the entire portfolio heavily.
E.g. $100 minimum into 50 notes at average 12% p.a. yields you $600 in gross returns. Assuming a 3% default rate on principal, your portfolio would still yield you $450 in gross returns.
Higher amount into lower yield and lower amount into higher yield
Some investors prefer to invest more into lower yield notes, since they are assessed to be stronger SMEs and smaller amounts into the higher yield notes.
A stronger SME would be charged between 8% - 11% in simple interest, while the ones assessed to have higher credit risk will pay between 12% - 16% p.a.
E.g. $1,000 into 3 notes at average 9% p.a. and $100 into 20 notes at average 14% p.a. yields you $270 from the lower yield notes and $280 from the higher yield notes for a total portfolio gross return of $550. Assuming a 3% default on principal, your portfolio would still yield $400 in gross returns.
Importance of reinvesting repayments
The power of debt investment lending is truly demonstrated when investors reinvest their repayments. Since all the listings on our platform have note tenors between 1 to 12 months, investors receive repayments in monthly instalments or bullet repayments within 4 months. This gives you the opportunity to further compound your returns by reinvesting the repayments into new notes, generating additional returns on both your principal and interests earned.
E.g. $1,000 into a 1 month invoice at 12% p.a. After a month, you receive your repayment of $1,000 principal and $10 gross return. You then reinvest the $1,010 into a 3 month note at 12% p.a. After one month, you receive $336.67 in principal and $10.10 in interest. You reinvest $300 into another note for 6 months at 12% p.a. Now you're generating further returns on your repayments that you've already earned interest on!
Disclaimer: This article is not meant to constitute/be construed as a form of recommendation, financial advice, or an offer, invitation or solicitation from Funding Societies to buy or subscribe for any securities and/or investment products. The content and materials made available are for informational purposes only and should not be relied on without obtaining the necessary independent financial or other advice in connection therewith before making an investment or other decisions as may be appropriate.