Diversification: The Best Practices in Managing Portfolio
There is a saying, "Don't put all the eggs in one basket". This saying can be applied in lending matters. That means, you must include diversification in your lending portfolio management strategy.
What is Diversification?
Diversification is a risk management technique by combining various products or funding instruments in a portfolio. The basic principle is that funding portfolios that are built from various types of products or funding instruments can mitigate the available risks if there is a loss in one of its funding instruments.
In this case, Lenders can take advantage of the relatively small initial funding that is intentionally set by KoinWorks, which is IDR100,000, to split the capital allocation to many loans at once.
That means that Lenders have the opportunity to share the magnitude of risk based on grade, tenor, loan type, and the most recommended practice is to have a lending portfolio containing a minimum of 100 loans at once.
For example, if you have a funding of IDR10,000,000, you should arrange a lending portfolio by diversifying the an amount of fund of IDR100,000 into 100 different loans at once with various interest rates and risks in order to maintain the level of profit and risk.
Thus, you can minimize the possible risks because when there is 1 Borrower having failed to pay/loan default, you still have 99 other Borrowers/loans who will still actively pay their installments.
By diversifying, we hope that when the basket falls, not all eggs break because there are still eggs in another basket.
More information about the lending diversification strategy on KoinWorks, please refer to this page.