Traditional investment instruments have been seriously challenged by modern FinTech solutions and not without a reason. The “classic” offerings, like stocks and bonds, haven’t changed their shape and form ever since financial markets exist. Even though trading has been made easier by digitalizing how investors track and interact with assets, the nature of the assets themselves is still the same. Today we will examine how a mutual fund – a classic collective investment trust, compares to a modern FinTech solution – P2P investment.
What is a mutual fund?
Mutual funds are professionally managed pools of money, provided by external investors. People participate in mutual funds by buying shares, similarly to stock trading. The fund managers are the ones who monitor the financial markets, perform analysis and decide where to invest shareholders’ money. In exchange a certain amount of fees is collected (usually, a percentage of the fund earnings).
And what is P2P investing?
Peer-to-peer investing is a FinTech solution that has become increasingly popular throughout the last 10 years. It’s performed through web applications and allows users to invest in personal loans. The loans can either be issued by an originator (a non-banking credit institution) or by the P2P platform itself, provided that it’s registered as a credit intermediary. The profit is then proportional to the size of the investment and comes from the interest rate of each loan and any applicable borrower fees.
How do we compare?
Mutual funds are a fairly good instrument tool for newbies and for people with less free capital. Usually you can buy as low as 100€ worth of shares.
P2P investing is even more accessible: some platforms, like us, let you start with asas 10€.
Mutual fund portfolios usually include hundreds of securities. However, keep in mind that the one who decides where to locate your finances, is the fund manager – not you. Fund managers usually spread the pooled capital between stocks and bonds.
With P2P diversification is in your hands. You have multiple loans to choose from and each loan has a different interest rate, risk rating, payment plan and borrower profile. You can also pick from various loan originators, countries and currencies.
• Risk and security
Even though mutual funds seem like a balanced investment method, they actually have an unattractive risk profile. As mentioned above, mutual fund portfolios include a vast mixture of securities. Their value changes daily and depends on various factors – some of them unpredictable. There’s always a chance for major market crashes, political instability, currency deprecation etc.
With P2P there is also risk, of course – but mostly the predictable kind. We, at iuvo, secure your investment using three main methods. Firstly, our loan originators are obliged to assess the expected default risk for each loan and indicate a risk rating. Secondly, they provide us with a detailed profile of each borrower. And last, but definitely not least, we offer a Buy-back guarantee, which ensures that in case of loan default, you will get your full investment back in 60 days. So, in reality, the only possible loss for you is losing the ability to make profit with certain loans.
Mutual funds can be part of a bigger plan, but they shouldn’t be the only instrument in your strategy. As convenient as it is to have the hard part done by someone else and collect your profit without moving a finger, it’s not wise to fully give up control. Especially considering highly volatile assets might be included in the fund portfolio.
The interesting part about P2P is you can use it as a single instrument. You can setup automatic investments, using loan filters with lower risk – they will bring you secure long-term earnings, albeit smaller. You can also set limits to the size of each investment as well as to the size of the final spend. While Auto Invest is working for you, you can use your time to browse our offerings and pick your high-risk investments manually, to try and secure a bigger short-term profit.
There are many investment instruments out there. Some of them have been around for decades (even centuries) and haven’t changed in nature. They are either not easily accessible and require a big starting capital for the profit to make any sense, or have unaddressed faults – like high volatility, low liquidity and the risk to lose your savings altogether. Smart FinTech solutions, like P2P investing, aim to solve most of these problems and provide you with a flawless investment experience. At iuvo we prepared a two-part guide to help you get started. Check it out: Vol. 1 and Vol. 2
Register at iuvo to experience the advantages of P2P lending. Join here!