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What is P2P auto-invest feature and how you should use it?

After the financial crisis of 2008, the interest rates have remained quite low in most of the western world. Keeping money in the bank would cause you to actually lose money since inflation is higher than the returns on most of the saving accounts. Therefore, the seasoned investors and market analysts have always repeated that ‘the best way you can defend against the inflation is to p2p investing.

What is an auto-invest feature?

Since the peer to peer lending market is growing, these alternative lending platforms are finding new ways to provide better services for investors to attract them to the platforms. The auto invest feature is a set of ‘buy’ orders that are implemented on a platform. This allows an investor to automatically buy p2p loans at pre-set parameters at a date in the future. The investors have complete control of the loan parameters which they want to select for a loan to be purchased. Whenever the investor has cash in their account the feature of auto invest will buy loans automatically. Investors save a lot of time this way and it also ensures that their money is quickly reinvested which can help maximise the interest earned.

Why you should use auto invest feature?

Increases your earnings

            One of the great benefits of auto invest is that it allows investors to dodge the ‘cash drag’. Cash drag is where you hold a specific amount of your free financial funds in cash, it does not get any exposure to the market. In simple words, when you invest, you will earn money and then cash it out.

With the auto invest feature, you can invest your earnings automatically and then you can earn ever more from the compound interest. This compound interest is a great mean to scale your profits. It is the interest which goes on top of the principal of the loan and on top of all the accumulated interest from the previous investments.

Is there any drawback of auto invest tool?

            The only issue with auto invest feature is that it works quite quickly, and it can’t be ‘reversed’. Once you set it up then you can buy thousands of loans within seconds. A lot of peer to peer investors have gotten loans in their portfolio which they were not expecting, as they did not spend time to set their auto to invest feature settings correctly. It is not possible to reverse the action of an auto invest feature, therefore it makes sense to be careful and strategic while using it.

Follow these golden rules for Auto-invest

 1. Carefully set minimum rates

One of the most critical settings of auto invest is the minimum rate. If you set it too high, then you won’t purchase any loans. Therefore, we recommend setting up a rate that is in line with the best interest rates currently available for that profile. However, there is a huge risk in setting the minimum interest rate very low. Remember that p2p platforms and lenders can see where the minimum rate is set. In case you set an interest, a rate which is below the current interest rate then you signal the borrowers that you are ready to accept a lower interest rate. This can result in p2p lenders cutting their rate to take benefit of the investors who have set a low auto invest rate orders.

2. Use all the options in setting

P2p investors like Mintos provide up to 14 different settings for every auto invest portfolio. It is significant that you review each one. In almost every case, higher and lower risk loans can be found through setting. For instance, several p2p lenders offer loans with a wide variety of LTVs, but with the same interest rates. If that is the case, then you have to set a limit on the LTV to pick up loans with lower risk profiles.

3. Use multiple auto-invest orders, instead of one

It recommended that you set up a multiple auto invest orders instead of one. There are a lot of reasons for this. First, if an auto invest feature doesn’t work as expected then it only affects only some and not all of your portfolios. Second, it creates a more customised and optimised sub-portfolios. For instance, you might need to set a lower minimum interest rate for some loans and a higher minimum interest rate for others. For a multi-lender platform like Mintos, it makes sense to establish a customised auto invest feature for every different p2p lender you wish to buy from.

4. Keep monitoring the performance and settings

It is important that you monitor the performance of the auto invest feature to ensure that it works optimally. It is common for an auto invest portfolio to become small than targeted. This might be because the interest rates have fallen below the minimum set level, or because a lender has loss loans available. Regularly monitoring your settings can help ensure that your funds are completely invested, and returns are maximised.

5. Use auto-invest feature when there is little benefit in self-selecting

Some of the p2p platforms make the auto invest feature mandatory. However, there are platforms which allow self-selection along with auto invest. In this case, it is recommended to use auto invest only when there is little benefit in self-selecting. For instance, in situations where you are buying loans with buyback guarantees or when no information is given usually for personal loans. You should never use an auto invest feature for loans like property development loans or any other kind of loans where careful analysis is needed. In this case, the auto invest feature can end up buying loans which the self-select investors did not want, which could mean that the loan has a high-risk profile or other problems.

6. Use the settings which can lessen your risk

You have to make sure that set up the auto invest feature to buy only loans which have no missed payments, even if there is a buyback guarantee. Further, you need to limit your exposure to any single loan and just buy loans from solid p2p lenders. Some of the auto invest features also allow you to buy loans which have been distributed before a specific date. You should use this setting, if a p2p borrower is ‘current’ and has been repaying the loan for six months then the risk profile is lower compared to a brand-new loan.