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Fractional Ownership: The Future of Private Investment?

Sun Jul 25 2021 by Bhuvan Rustagi

While there are several ways of investing money, recent data has suggested that few people in India are doing so. For instance, only 3.7% of India's population invests in the stock market. This may be because several Indians are not aware or educated about investment options or are wary of investing beyond their savings and term deposits. However, it could also be because people often do not have enough cash to invest in the assets of their choice since a lot of them can require high capital commitments and lock ins.

Therefore, they may have to stick to investing in safer options like mutual funds and fixed deposits. These issues could be solved by opting for fractional ownership. Though the concept is new in our country, several online marketplaces offer fractional ownership in India.

What is Fractional Ownership?

Fractional ownership is the investment option that allows several people to hold a high-value asset jointly. This can be done by buying an asset through a special purpose vehicle and then distributing its shares among individual investors. This process can also be called tokenisation. Though tokenisation usually involves representing a fractional ownership interest in a property on a blockchain, this is not always necessary. For example, in India, it is often used to divide ownership in real estate, with each investor receiving a real estate token.

Several kinds of assets can be owned jointly. However, the most popular fractional ownership option is real estate, in particular commercial real estate. Stockbrokers in the west like Robinhood are also allowing people to buy stocks in fractions. Similarly, you can also buy a fraction of cryptocurrencies like Bitcoin. Some firms also provide the opportunity to invest in other assets like loans and debts.

For instance, a P2P marketplace that offers loans also allows investors to fund the loan payments. Each investor then receives interest on the loan based on their investment. International firms like Masterworks also allow people to fractionally own high-profile paintings and artworks that you could probably never afford on your own. A Note Music is a P2P marketplace that enables people to invest in artists' music catalogues and earn passive income through their song royalties. Some platforms are also considering using fractional ownership for leasing, invoice financing, and sales invoice discounting.

What is Invoice Financing?

Invoice financing is a method used by several companies and small businesses to prevent cash-flow problems. For example, companies often deliver goods to customers at a specific date but are set to receive the payment much later. This makes it difficult for them to finance other ongoing projects. This is where an invoice financing platform steps in. They usually take the payment invoice from the firm and pay them the money they are owed immediately after deducting a small fee. They then collect the full payment from the client. Invoice discounting is another method of invoice financing where a company or a lender takes invoices of sales made from businesses as collateral and provides them with loans. Fractional ownership can help boost this sector, with a group of investors coming together and funding invoice payments or invoice-based loans. In return, they get a specific return on their investments at low risk.

How to Invest in Fractional Ownership?

Currently, many investment platforms in India, like Lendbox, Strata, and MYRE Capital, provide fractional ownership opportunities. These online platforms have made handling such investments very simple. You just need to provide your bank and KYC details to start investing. Other information regarding the asset and its management is taken care of by the firm at a nominal fee. These platforms also enable you to track your portfolio online easily.

What are the Benefits of Fractional Ownership?

Fractional ownership can enable people to buy expensive assets like corporate real estate at low costs and reap the benefits. It also helps investors diversify their portfolios and limit their risks. It is also easy to liquidate your investments as you can always quickly transfer your share of an asset to an existing owner or sell it off to someone else. This is often easier than moving a physical asset. Additionally, fractional ownership ensures good and steady returns, especially when it comes to assets like real estate. Finally, it is a great way to earn a passive income with minimum risk. Because of these benefits, fractional ownership has been gaining popularity among new-age investors.

Conclusion

If you have always dreamed of owning high-value tangible assets but couldn't do so, fractional ownership can help you achieve your goals. It is a less volatile investment option; however, it also provides lesser yields than the equity market. Though there are several benefits of fractional ownership, especially as it is a budding investment opportunity in India, various risks are involved. Therefore, you should also conduct your research to understand if the option is suitable for you.