Why is diversification important in SME Digital Financing?

Diversifying your investments across multiple notes is one way to increase the success of your investments on digital financing platforms. While some investors already know the basic concept of diversification, which is generally not to put all your eggs in one basket, there are other investors who might still not understand the importance and impact of diversification in this kind of financing.

Investors may lose their entire principal amount

Digital financing generally has a capped interest rate for its investors. The maximum interest allowed in digital financing is 18% p.a. In a best-case scenario, you will enjoy a return capped at 18% p.a. However, in the worst-case scenario, you could also lose 100% or your entire principal amount.

To understand the concept more clearly, please refer to our illustrations below on the different approaches taken by Investor A and Investor B on their investment of RM10,000 each onto a digital financing platform.


Investor A – High Concentration Approach

Investor A invests RM10,000 into a single note with an interest rate of 10% p.a. for a period of 12 months. Investor A may expect to earn RM1,000 in interest for this note, however, this may not necessarily be the case. 

We list down below, the  possible outcomes of this investment for Investor A:

Outcome 1: If the Issuer pays back promptly

If the note has not defaulted, the outcome of the investment for Investor A will be:

Principal Received: RM10,000

Interest Received: RM1,000

Loss: RM0

Rate of Returns on Investment: 10%

Outcome 2: If the Issuer defaults on the 7th month

If the note defaults on the 7th months, the outcome of the investment for Investor A will be:

Principal Received: RM5,000

Interest Received: RM500

Loss: RM4,500

Rate of Returns on Investment: -45%

Outcome 3: If the Issuer defaults on the 1st month

If the note has defaulted with no repayment, the outcome of the investment for Investor A will be:

Principal Received: RM0

Interest Received: RM0

Loss: RM10,000

Rate of Returns on Investment: -100%


Investor B – Diversification Approach

Instead of investing in a single note, Investor B splits his investment amount of RM 10,000 into 100 notes of unique companies worth RM100 on each investment. If the average tenure of a note is 12 months and the average interest rate of each note is 10% p.a., Investor B may expect to earn an estimated cumulative sum of RM1,000 in interest for all the invested notes.


A 2% default rate across a diversified portfolio of 100 notes of unique companies and given that 2 out of 100 unique companies (2% default rate) defaulted, Investor B is estimated to lose RM200. In this instance, the estimated rate of return on investment for Investor B will be 7.8%

By comparing the 2 approaches taken by Investor A and Investor B, a more consistent return is possible for Investor B due to lower concentration risk. The diversified approach adopted by Investor B is also suitable for a long term investment in digital financing due to controlled concentration risk.

A diversified portfolio may provide high consistency in returns

The above chart shows that the higher the number of unique SMEs that an investor has invested in, the more consistent the annualised net returns will be. However, it should be highlighted that diversification here does not eliminate or remove all risk in respect of investment.

Some may assume that the chances of experiencing a default on a single note are low. This is not necessarily true. Therefore, Funding Societies highly recommends its investors to diversify their investment portfolios across as many notes as possible

Plan to diversify your investment portfolio? Click here to start your investment with Funding Societies Malaysia.

Need funds for your business? Click here to get financing for your SME.

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Disclaimer: The information provided to you in this blog post is intended only for general information purposes only and does not constitute legal or other professional advice on any subject matter. The materials and the information provided are not intended to be and do not constitute an advertisement or solicitation.  In no event will Funding Societies be liable to any party for any direct, indirect, incidental, special, consequential or punitive damages for use of such information by you or any unauthorized third party.