The idea of making big bucks from capital markets runs deep into some. Market commentators also add to the hype by constantly saying that equities are best bets for wealth creation. We, at Wishfin, don’t deny this statement at all. But there are quite a few who take loans to invest in equities or any other financial instruments. Many get trapped in a vicious debt cycle because they lack the market acumen. The article will tell you why taking a loan to invest in equities and other financial instruments is not a good idea. So, read on!
Table of Contents
- 1 Reasons That Tell You to Avoid Taking Loans to Invest in Equities
- 2 Bonds & Debentures are a Relatively Safer Option – But Shall You Take Loans to Invest in them?
- 3 If at All You Want to Invest, Do So with Your Savings!
Reasons That Tell You to Avoid Taking Loans to Invest in Equities
Equity investments can generate handsome returns for you. The best part is that there’s no limit to earnings. But there’s no denying the possibility of constant up and down of stocks decreasing the value of your investments. The value can even fall below your expectations. So all that money you borrow to invest in these instruments will not make you feel happy while paying the loan EMIs. It will rather rub salt on your wounds!
Bonds & Debentures are a Relatively Safer Option – But Shall You Take Loans to Invest in them?
Bonds and debentures are issued by companies to raise money from the public. These are much safer instruments compared to equities. That might make you feel like investing in these by taking a loan. Sadly, they don’t deserve investment via loans. The reason being the earnings from bonds, debentures & other debt instruments fall in the range of 7%-8% per annum. Post-tax, the returns get even shorter. In contrast, the loan rates can be anywhere between 10%-20% per annum on average. The money you earn from debt instruments is way short of the payment you make towards a loan.
If at All You Want to Invest, Do So with Your Savings!
As investments are vital for a strong future, you have to do it. It’s just that you need to save enough from your daily routine and put that in instruments that go with your investment style, risk appetite and financial goals. Those looking to generate large corpus and have high-risk appetite can invest in equities. Whereas, people with less risk appetite can choose to invest in bonds, debentures, etc.
But Shall You Invest in These Financial Instruments Directly?
We say ‘No’ to direct investment in either equity or debt instruments if you don’t have the market acumen. You can, therefore, invest in either equity or debt mutual funds, depending on your risk-appetite. The difference that mutual funds bring is the allocation of assets according to the market situation. Yes, the Asset Management Companies (AMCs), which offer mutual funds to investors, hire fund managers to channelize your investments keeping in mind the economical and political scenario of local and international markets. So, when the portfolio is designed in line with the market demands, chances of good outcomes are always on the higher side.
Disclaimer – “Mutual fund investments are subject to market risks. Please read the scheme related documents carefully before investing”