Should You Take Personal Loan For Investing In Stocks and Mutual Funds?

Numerous financial demands may benefit from a personal loan. But what if you take out a personal loan to invest in mutual funds and stocks? Read on to learn the benefits and drawbacks of personal loans.

10 Jan,2023 12:20 IST 706 Views
Should You Take Personal Loan For Investing In Stocks and Mutual Funds?

India’s stock markets have touched record highs in recent years, enticing investors with high returns. These investors either buy stocks directly or invest through mutual funds. As investors swarm to the stock market, the number of demat account holders in India has risen sharply and surpassed the 10-crore mark.

As the culture of investing grows, many people are even taking out personal loans and putting the money in the stock market or in mutual funds. But is getting a personal loan and investing in the stock market a good idea? There are different views, with some advising prudence while others favouring using leverage as a tactic.

Leveraging is the process of obtaining a loan in order to invest. Many people employ this tactic to maximise their profits. Leveraging can boost profits since it gives investors access to a bigger pool of capital to invest. It, however, also has the potential to result in debt because stock market investments can be very risky. So, before taking out a personal loan to participate in the stock market, one must carefully weigh the benefits and drawbacks.

Pros Of Availing Personal Loans To Invest

• Timing is the key to successful stock market or mutual fund investing. To swiftly invest in the stock market, investors need money. And one can get a personal loan approval in just a day or two.
• Personal loans don’t have end-use restriction, meaning the borrower is free to use the money for any purpose, including stock market or mutual fund investment.
• Personal loans don't require any collateral, so there is no chance of losing any asset.
• Personal loans provide access to a larger pool of funds for investments. By distributing risks among a wider range of assets, a greater corpus will reduce hazards.

Cons Of Using Personal Loans To Invest

• There is always a chance that you could lose your money because stock markets can be very unpredictable. In the event that the stock market underperforms and drops suddenly, one may be left with a huge debt.
• Personal loans cost more than secured loans since they are not collateralized. The likelihood of profiting from the use of leverage is reduced if the personal loan’s interest rate is very high. The return from investment has to be higher than the rate of interest on the loan taken to invest in stocks or mutual funds.
• Investing in the stock market carries a high level of risk. The borrower’s willingness to take risks will be greater when they are younger and have a longer period of employment ahead of them. When one is close to retiring, one should refrain from taking chances because one could lose one’s whole retirement fund.
• Often, stock markets can underperform for several years or fall sharply in a matter of days due to reasons beyond one’s control. In such cases, the investors would either have to cut their losses and sell or stay invested and wait for the markets to recover. So, it is best to stay away from stocks and mutual funds if your investment horizon is limited since the personal loan is typically for a short tenor.

Conclusion

It is not a bad idea to invest borrowed money in the stock market. However, since the returns are not guaranteed, one must be very careful of taking out a personal loan to make such investments.

One should avoid using borrowed money to place speculative bets and only invest in stocks or mutual funds with a strong track record that have a high probability of generating profits over the long term.

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