Our seven-part diversification series aims to give you an in-depth explanation on how you can get the best from Mintos and create a well-diversified investment portfolio. Our previous articles showcased diversification on Mintos through different loan types, maturities, geographies and currencies. You can read the previous articles here.
You may be tempted to take that handy interest rate slider on the Mintos marketplace and adjust the selection towards the higher end. Every investor wants to maximise return and at the same time lower risk. However, the market ensures that loans with higher returns also come with higher levels of risk and vice versa – investments with lower risk mean lower returns. Still, there is a way to get solid returns while minimising the risk at the same time and that is – by diversifying your portfolio with different return rates.
Investing in loans with different return rates
When thinking about diversification, consider your investments as a portfolio, rather than separate individual investments. If your portfolio is well-diversified and you ensure the risk is not concentrated, the whole can actually be more valuable than the sum of its parts. This is because, when diversified, you have a portfolio that is balanced between minimising risk and achieving a targeted level of return which should result in consistency. It is more beneficial than select loans giving you inconsistent returns.
By diversifying across different return rates and, thus, also different levels of risk, you are spreading out the risk in your investments and reducing it overall for your investment portfolio.
Investing in loans with different rates opens you to different types of loans and you can diversify across borrower profiles, geographies, currencies, loan types and maturities.
For example, the borrower class for personal loans from Georgia with high return rates is very different to personal loans from Poland with lower return rates. The differences in borrower classes can range from different levels of financial security, previous credit history and many more factors. Although high returns are nice, they often come with higher risks – for example, the borrowers are more likely to default. Therefore, for optimal diversification, your loan portfolio would include both loans with higher return rates and loans with medium rates to offset the risks and ensure a solid return.
There is a common perception that as long as a loan comes with the buyback guarantee, it doesn’t matter if the borrower defaults as you would still get back your investment, right? However, there’s more to the buyback guarantee than meets the eye and we will be taking a closer look at loans with the buyback guarantee in the next article of this series.
How to invest in loans with different return rates?
On the Mintos marketplace, there are many loans with different return rates ranging from 5.5% to 20%.
If you invest on Mintos manually, you can select the return rate at the top right-hand side of the page by moving the slider underneath “Interest Rate”.
You can move the sliders on each end for a more narrow selection:
If you use Auto Invest for your investments, you can also move the slider underneath the heading “Interest Rate” to select your desired net annual return rate.
Diversification is a great tool to help you manage risk and reduce the volatility of your investments. When you consider adding an investment to your portfolio, always be sure to determine whether the investment will further diversify your portfolio or if you are actually concentrating your funds further.
Investing in different return rates is a good strategy to make sure your investment portfolio is diversified on the Mintos marketplace. This is in addition to investing in different loan types, different maturities, different geographies and currencies. All of these variances can help make a well-diversified loan portfolio that should give you solid returns while minimising risk. However, the Mintos marketplace offers even more ways to diversify your investments, so be sure to stay tuned for the next article in this series.