Some of the more popular investment avenues for the average individual investor include shares, bonds, stocks, mutual funds, fixed deposits, etc. The government securities and debt instruments are the more stable ones (offering steady but comparatively low returns). In contrast, the equity instruments carry higher risk and, consequently, relatively higher returns.
As much as the stock market is for investors with a higher risk appetite, the returns are so attractive that they often convince them to go all out. And this is with good reason; that’s because strong and logical investments in the stock market often design the blueprint to long-term and vast wealth accumulation.
This finally brings us to the question at hand - should you ever use a personal loan to invest in the stock market?
The process of taking out an instant personal loan and investing it in shares is called gearing or leveraging. While there could be a section of suspicious investors not wholeheartedly given to the idea, leveraging can have its benefits.
- With a personal loan, you have a greater corpus to invest in the market, encouraging the chances of making a hefty profit. This is because a personal loan translates to more funds in hand, which in turn opens up a greater investment value spectrum for you.
- Availing of any loan comes with associated costs that include (often high) interest rates and monthly loan servicing expenses. Investment helps you because the income that accrues acts as a cushion for such ancillary expenditure.
- Your taxable income reduces should the expenses outweigh your income from the investment.
But there are two riders that you need to factor in if you are thinking about using a personal loan to invest:
1. Consider the interest rate on loan and account for all the repayments
Before giving yourself the go-ahead, you should be certain of the lender’s interest rates on the loan and take stock of all your monthly repayments. A higher interest rate means you will have to make an increased profit on your investments to service the interest payable – you don’t even reap the profits in that case. Therefore, deciding to avail of a personal loan to invest in the stock market should hinge on your knowledge of the lender’s interest rates and other mandatory expenses. Go for a lender, the policies that meet your financial objectives, and you should be good to move forward with your decision.
2. Know all about investing
One of the primary reasons some investors fail to capitalize on the market is that they don’t have the knowledge repository considered principal for investments. Study about stock and know why it has been performing the way it has before investing in it. This will also give you an idea of the stock’s performance from the beginning, helping you predict future trends and patterns.
Additional Read: 4 top factors that led to the growth of NBFCs in India
Using a personal loan to invest has its upsides, and you could also better your credit score if you are wise with the process. But it is good to be careful and be in the know of its guidelines. Err on the side of caution, and this might turn out to be a sound financial decision after all.
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