For every loan made, there is always a risk of default. The default rate as on 14 December 2018 in Fundaztic is 2.28%. The amount involved is more than RM 750000 (Link). Recently, there is a note in my portfolio that has defaulted. By Fundaztic definition, a note is considered as default when the borrower misses a payment for more than 60 days.
If a note has defaulted, does it mean that our invested money is lost? According to the platform, we still have a chance to get back our money.
Management of overdue notes
The platform uses two approaches (soft and hard) to handle defaulted notes. The first is collection (soft approach) and the second is recovery (hard approach).
Collection
Fundaztic uses the soft approach when the note is overdue for less than 60 days. With this approach, the platform is still trying to elicit payments by itself.
Recovery
When the note is overdue for more than 60 days, the platform will take legal action against the borrower. Even if legal action is taken, the platform still welcomes the borrower to come forward and try to settle the matter.
Costs
Obviously, there will be costs involved in the process. Nonetheless, Fundaztic will bear the expenses first and we will only need to pay for these expenses if the recovery is successful. The fees will be deducted from the recovered amount and the balance will be returned to the investors.
If the process fails, we do not have to pay for the expenses. However, it will be a total loss for us then.
Communication with investors
During the debt recovery process, the platform will notify the affected investors through email. The communication is on a monthly basis till there are changes in status to the process.
Risk minimization
The risk of default cannot be eliminated completely. To minimize this risk, Fundaztic recommends a strategy of diversification. Specifically, the platform recommends holding a portfolio of at least 100 notes. However, this strategy requires an investment amount of at least RM 5000 (minimum investment amount per note is RM 50). So, this might not be achievable for some investors. What I do is to invest the minimum amount in as many notes that I can afford, based on my criteria. Currently, I have invested in 14 notes. Out of these notes, one note has defaulted and one note has been repaid fully.
My experience
For the defaulted note, I received an email after two and a half months of its first non-payment. I did not receive any notification during the collection period. It is exactly as what Fundaztic says it would do.
Currently I am still waiting for the outcome of the recovery process. I will write a new post when the process comes to an end.
[There is a new update to this article. Please click here to read.]