Everyone wants a piece of the action with stock indices in India near their all-time highs. As more and more investors are flocking to the stock market, the number of demat account holders in the country have skyrocketed and crossed the 10-crore mark.
With investment culture spreading, many are even taking personal loans and investing it in stock market. But is it a good idea to take a personal loan and invest in stock markets?
While some experts advocate leverage as a strategy, others advise caution. The process of taking a loan to invest is called leveraging. It is a strategy many use to maximise profits. Leveraging can increase the profits as it allows the investor access to larger pool of funds than what one owns to invest in stock markets.
However, leveraging can also potentially land one in debts as investments in stock market can be extremely volatile. So, one should carefully evaluate the pros and cons of taking a personal loan to invest in stock market.
Advantages Of Availing Personal Loans To Invest
No End-Use Restrictions:
Most loans come with an end-use restriction, meaning the money sanctioned can be used only for the purpose for which it is taken. But personal loans normally do not have any such restrictions. The borrower is free to use personal loans for anything, including investing in stock market.
No Collateral:
Personal loans are unsecured and do not need any collateral. There is no risk of losing the collateral unlike a car loan or a home loan. In a secured loan, the lender has the right to sell your asset recover the due amount.
Quick and Easy:
The essence of investing in stock markets is timing. Most investors require funds to invest in stock market quickly. Personal loans are quick and easy to avail and can be disbursed as quickly as a day.
Larger Corpus:
Personal loans will give access to larger pool of money to make investments in stock market. A larger corpus will minimise risks by spreading over a larger basket of assets.
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Disadvantages Of Using Personal Loans For Investment
Volatile Markets:
The upside to investing in stock markets are huge. One can make a lot of money when stock markets are booming. But there is always the danger of losing your capital also because stock markets can be extremely volatile. One can be left with a huge debt, if the stock does not perform well. In such cases, the borrower will not only lose the capital, but will be left with a huge debt to repay to the lender.
Rate Of Interest:
As personal loans are uncollaterised, they tend to be costlier than other loans. If the rate of interest on the personal loan is very high, then the chances of making a profit on the leverage is lower. It is not advisable to take a personal loan and invest in stock markets if the borrower’s CIBIL score is less than 750. This is because the interest rate on personal loans will be higher when the CIBIL scores are low.
Shorter Tenure:
Personal loans are typically for shorter tenures. The longer you stay invested in stock markets, higher the chances of making money. In the short-term, stock market investments can be very risky.
Investment Horizon:
Stock market investments are risky investments. It is better to avoid investments in stock market if the investment horizon is short. The appetite to take risks will be higher when the borrower is younger and has a number of working years left. One should avoid taking risks when one is nearing retirement, as there is the danger of losing the entire retirement corpus.
Avoid taking speculative bets with borrowed money. Invest in stocks with a good track record where there is a good chance of making money over a period of time. The investments must be in such stocks that the returns will be quicker than the tenure of the loan.
It is not a bad idea to invest borrowed money in stock markets when one is confident about the prospects of the stocks. But be sure to have a backup plan to repay the loan, if the stock does not perform as well as expected.
Conclusion
Stock market investments are very risky. One must be careful in using personal loans to invest in stock markets. But one can make money if invested wisely after carefully evaluating the pros and cons.
Also, one must borrow money only from reputed and well-regulated lenders. IIFL Finance, for instance, offers instant personal loans of up to Rs 5 lakhs, which is disbursed within 24 hours. IIFL Finance also offers competitive interest rates and makes the process of availing and repaying the loan as seamless and hassle-free as possible.
