One of the most prudent financial advice for anyone nowadays is investing their money. If you are looking for financial stability and security in the long run, nothing works better than putting aside part of your income for some form of investment. There are several different classes of assets in which one can invest their money and one among these is the stock market.
It is the stock market where the trading of shares of publicly-held companies is done and it is one of the most popular investment classes owing to the significant high returns it affords. However, investing in the stock market is fraught with risks and must only be done when one has a significant risk appetite and knowledge of investing.
If you are someone who is keen on investing in the stock market in order to make the most of the potential high returns, a great idea is to set aside a small capital for investment. One idea which has caught on among investors in the stock market of late is that of taking a personal loan for investing in shares. But how advantageous is this idea?
Understanding personal loans for investments
Obtaining a personal loan to make an investment in the stock market is known as leveraging. The idea is that since the returns obtained from this type of investment are significantly higher, the cost of the loan is easily recoverable with a tidy profit alongside.
When it comes to leveraging, there are significant pros and cons associated with the process and only after one understands them completely, and knows the workings of the stock market, should one consider taking a personal loan to invest in shares. In the following sections, we will take a look at some of the pros and cons of taking a personal loan to invest in the share market and how to go about obtaining such a loan.
Pros of taking a personal loan for stock market investment
There are a number of benefits of taking a personal loan for making an investment in the stock market, which are as follows:
- Higher corpus
When one takes a personal loan to invest in shares, there is a much higher corpus of funds available to the investor. Unlike investing from one’s savings or from setting aside part of one’s income and cutting down on other expenses, with a personal loan you can easily have a large sum which you can invest in the shares you want to and make good returns.
- Greater tax benefits
Under the taxation norms, with a personal loan one can claim dual benefits. One set of benefits will accrue from the concessions granted on the investments under Section 80C of the Income Tax Act in India, and the other set comes from the rebate available on loan repayments.
- Meet ancillary costs with profits
No doubt a personal loan comes with own set of additional expenses which include the interest and the servicing charges. Investments made in the stock market with a personal loan can help meet these expenses when significant profitable returns are made on the investments.
Remember, investing in the stock market is full of risks but if you are wise about where you put your money, you can reap significant profits which will outweigh the cost of the personal loan you took in the first place.
Cons of taking a personal loan for stock market investment
While there is no denying the benefits of a personal loan for investing in shares, there are a number of factors which go against this type of borrowing. Some of these are:
- High interest rates
Personal loans comes with high interest rates which get added on to the cost of the loan when it comes to repayment. If one does not make enough profits in the stock market, leveraging will create a negative burden on the borrower’s finances.
- Negative returns
If you do not make the right investment choices in the stock market, chances are that your portfolio will run into negative returns. This will not just affect your investment but also put you in a financial crunch where you will need to repay the loan from your own savings.
Things to consider when taking a personal loan to invest in the stock market
If you think you can handle the pros and cons of a personal loan for investing in the stock market, there are still important factors you will need to consider when obtaining such a loan. Here are some tips to help you decide if leveraging is the right way ahead for you when it comes to making investments:
- Compare interest rates
When you are obtaining a loan for the purpose of investing, it is important that you find the loan with the most favourable interest rate. Different banks and non-banking financial institutions offer loans at varying interest rates depending on the loan amount prevailing market factors and the credit score of the borrower. Since the interest rate will determine the overall cost of your loan, you will need to compare loans to check which interest rates are the lowest so you can manage the cost of repayment.
Additionally, higher interest rates will imply that you will end up paying a much larger chunk of your bank to the lender, which will eat into your profits. An ideal scenario would be if the annual interest rate does not exceed half the average return rate expected from your investment.
- Evaluate the payment options
When leveraging, one of the main goals is to ensure that you make enough returns on a regular basis to make a tidy profit and also to repay the loan amount.
However, if you are an investor who believes in long-term investment and holding the shares, generating sufficient returns will take time. In such a case, it is important to evaluate the payment option so that it is feasible for you.
- Determine if you are a risk taker
Investing in the stock market requires a significant appetite for risk. The performance of the market and the returns generated are dependent on a number of factors which may vary over time and even generate negative returns if the market is down. In such a case, you might lose money if your investment is not made prudently. At the same time, some stocks dip in the short term and generate profitable returns only over the long term.
Given that the market can change suddenly overnight, you need to be prepared to handle the possibility of a drastic change in the stock price as well. Depending on your appetite for risk, your investment pattern may be very different and this may not be aligned with the strategy you might need to repay a loan taken to invest in the share market.
- Carefully go over the investment performance
Before you take a personal loan to make an investment in the stock market, carefully go over the investment performance. Since negative returns are not an option since you will be relying on borrowed money, it is a good idea to research and analyze the potential of returns. Take a look at the past performance of the stock you are planning to invest in as this will give you a clear idea about the potential it holds for generating suitable returns.
Remember to analyze the performance since the inception of the stock and compare the annual performance and percentage growth in the stock price. If you are not careful about your research, you might end up losing money on your investment.
- Calculate all the expenses involved
When it comes to taking a personal loan for the purpose of investing in the stock market, one needs to take into account all the associated expenses. The principal on the loan and the interest are not the only expenses to be considered. Often, lenders may charge financing and servicing fees.
At the same time, of you are investing in the share market through a broker, you will also need to add these to your expenses. There are also taxes to be paid on the purchase and sale of shares which are added to the trading costs. All these expenses need to be deducted from the profit you will generate on your investment.
Taking a personal loan to invest in the stock market is not an idea that needs to be rejected outright. If you are careful in your investment, can take the associated risks and have done your research, a personal loan will give you a corpus of additional funds you can put to use for generating good returns. Just be sure to carry out the due diligence and put your money in the right stocks so that you can generate adequate returns to repay your loans as well as make a neat profit on your investment.
To obtain an instant and hassle-free personal loan to invest in the stock market, use PaySense. An online lending platform, PaySense disburses quick personal loans through their mobile app. All you need to do is download the PaySense app and install it on your phone. Register yourself and upload your KYC documents. Once you check your eligibility, calculate the EMI and loan tenure which is most suitable to you. As soon as your application is approved, PaySense will clear the funds to your bank account. For more information, write to [email protected].
Aahna Gandhi is an enthusiast traveller, writer and a PR Professional. She likes sharing memorable moments from her travels and inspire others to live a life full of wonder. Known for her content, she has worked for travel, technology, lifestyle, health sectors as well as finance.
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