On Mintos, there are seven ways you can diversify your investment portfolio. Our diversification series has been taking a closer look at these strategies so you can have a well-diversified investment portfolio on our marketplace. So far investing in different loan types, maturities, geographies, currencies and return rates have been discussed. To see what the previous five steps were, click here.
The sixth way you can diversify your investments on Mintos is by selecting loans for investment with and without the buyback guarantee. The buyback guarantee on Mintos is an assurance by the loan originator to the investor. This guarantee confirms the loan originator will repurchase the particular loan from the investor if the borrower’s payments are delayed by 60 days or more. If this occurs, the loan is automatically bought back by the loan originator at the nominal value of the outstanding principal, plus accrued interest outcome to date. On Mintos, all loans with the buyback guarantee are marked on the marketplace by a shield icon .
The buyback guarantee from loan originators is great for minimising risks for investors. However, buyback guarantees are mostly offered to high-risk consumer loans such as unsecured and short-term payday loans. Although the buyback guarantee shifts the borrower default risk from investors to the loan originator, the default risk is still there.
Investing in loans with and without the buyback guarantee
A common misconception is that if you invest only in loans with the buyback guarantee, diversification is not necessary. However, that is not true. Even when you invest in loans only with the buyback guarantee you should still spread your investments across multiple loans, even if they are from the same loan originator. Why is this, you might ask? If you invest, for example, EUR 1 000 on Mintos and invest the total amount into one loan with the buyback guarantee, and in the unlikely case the loan originator defaults, they are no longer able to uphold the buyback guarantee. If the borrower then defaults on the loan, you could lose all of your investment. However, if you had spread your investments across, for example, 40 different loans with the buyback guarantee (EUR 25 in each) and the loan originator would go bankrupt, then if some borrowers default you would lose only part of your invested principal. Investing in loans with the buyback guarantee from different loan originators will also increase your diversification and further protect your investments as you are spreading the risk.
Another reason why it is important to invest in multiple loans with the buyback guarantee is to achieve a better repayment spread. If you have only invested in one loan, then you will only receive your repayments either once per fortnight or month, depending on the borrower’s repayment schedule. However, if you have invested in multiple loans, which will most likely have different repayment schedules, you will receive more constant repayments and therefore have less cash drag. This is important, as cash drag can hurt your portfolio’s returns over the long term because you are not invested in the market and therefore missing out on potential returns.
It is also important to note that not all loan originators offering the buyback guarantee on Mintos accrue additional interest on the delayed part of the payments. This means, when a borrower defaults on their loan you may only receive the interest that was accrued up until the moment when the payment was due.
On Mintos, you can see whether the loan originator offers interest on delayed payments in the “Loan Originator” section by selecting “More Information” on your chosen loan originator, and then select the “Details” option.
On Mintos, it is important to not only invest in loans with the buyback guarantee, but also in loans that come without the guarantee. It is often thought that these loans are inherently riskier than investing in loans with the buyback guarantee, however, loans that are not secured with the guarantee are usually lower-risk loans that are often instead secured with collateral which can range from cars to property. Adding these other types of loans to your investment portfolio is crucial to achieve a well-diversified portfolio and earn stable returns as discussed in the previous articles in this series. This way you get access to different borrower classes and minimise the overall risk of your portfolio. If you invest only in loans with the buyback guarantee, you are missing out on the many benefits diversification offers.
How to invest in loans with and without the buyback guarantee
There are two ways you can invest in loans with and without the buyback guarantee, depending on whether you invest manually or with Auto Invest. If you invest manually, you can filter loans on the Primary and Secondary Market using the “Buyback Guarantee” filter which can be found on the left-hand side.
For Auto Invest, the filter can be found at the top of your Auto Invest Portfolio.
There are numerous opportunities for you to create a balanced and well-diversified portfolio on Mintos. Use the abundant opportunities our marketplace can provide you by investing in different types of loans, maturities, geographies, currencies, return rates and loans with or without the buyback guarantee. However, this is still not all the ways you can diversify your investment portfolio on Mintos – there is still one final way you can achieve a balanced and diversified investment portfolio, which will be revealed in the final article in this series. Stay tuned for its release next week.