Here's How You Can Use a Personal Loan For Investment?

Jul 23, 2020Personal Loan

A personal loan can be an attractive option to access quick and easy funds to make investments. The route is appealing as a personal loan for investment is basically unsecured. This means that you do not require you to support it with collateral at all. 

If you are able to tick all the right boxes of the eligibility criteria, the financial institution will only look at your credit score, credit history, and income to decide on the personal loan interest rates. If everything works out to their satisfaction, your loan will be approved and disbursed. This will give you instant access to a lump sum of cash which you can then use for the purpose of investment. 

Investment Instruments Where You Can Make Use of Your Personal Loan

Even though there are several avenues available, not all of them make sense as a potential channel of investment with the cash from your personal loan. 

Look at these three scenarios that could pay off for you:

1. Personal Loan to Invest In Shares

Shares are a typical basket of investment for the average investor, often giving higher returns in comparison to government securities and debt instruments that offer low but steady returns. That said, there is a greater degree of risk involved by using your personal loan to invest in shares in spite of the high returns that you get. 

Which brings us to the question – is it a good idea to use your entire personal loan to invest in shares? 

It makes sense to do that because with a personal loan you have a lot more capital to invest in a market that has the potential to generate a hefty return. This opens up a greater investment value spectrum for the investor simply by the virtue of having access to more funds to invest. However, you should be prepared to also accept the fact that using a personal loan for intra-day trading may not be a good idea. The market is extremely volatile at this moment, and if your investments don’t pan out, you will still be left with EMIs to pay. Thus, using a personal loan for investment only makes sense if you are looking at long term returns, while at the same time, you have access to a stable income source. In that way, you will be able to take care of the monthly EMIs without worrying too much about short term performance.

Must Read:How to Avail Tax Benefits On Personal Loan?

Additionally, the investor has to bear in mind related costs such as the interest rates and processing fees on the personal loan. Therefore, it is just prudent to invest in a channel that offers high returns and can offset these added expenses, plus generate income for the investor and be the cushion for any ancillary expenditures. 

2. Personal Loan To Invest In Stock Market

When you decide to invest in stocks, you are basically purchasing a piece of a company’s earnings and assets. Stocks are subject to market risks and the returns are directly influenced by its fluctuations. 

It is recommended that you do your homework before jumping into investing in stocks with borrowed funds. Shortlist the stocks where you intend to invest, study, and analyze its performance over a significant period of time. 

Utilizing your personal loan to invest in the stock market and equities is not for the faint-hearted. No doubt the temptation is for fancy returns can be quite appealing. But from the investor’s point of view, you need to understand the power of leveraging before you jump the bandwagon to make a fast buck.

There is a twofold benefit when you invest your personal loan funds in the equity market. Because you have access to more funds, you can increase your profits substantially if and when the value of your asset rises too. Additionally, you can derive and income from this investment as well. 

Always keep in mind that this investment instrument does not automatically guarantee high returns. A stock that might be doing well today can underperform in the future. It is best to be cautious and go for long-term play. If you are looking for short-term gains, you could end up losing money instead. 

3. Personal Loan To Invest In Mutual Funds

Personal loans guarantee investors with a lump sum of money in addition to the corpus that they may have built separately. Hence, when the markets are indeed on the rise, the high returns from mutual fund investments can be extremely rewarding. 

The benefit of investing in mutual funds with your personal loan slightly outweighs the risks as they seem to be too far-fetched. On the other hand, the bear market syndrome is nothing new in mutual funds, and encountering something like this long term can adversely impact the investment. 

But there is liquidity in the investment as mutual funds do not block your savings for a specific period of time. In addition to that, investors can claim deductions on their taxable income from mutual funds under Section 80C of the Income Tax Act 1961.

Must Read:How to Apply for a Personal Loan Online

Unfortunately, using a personal loan for a mutual fund makes absolutely no sense. Instead of taking a loan and paying EMIs which will include the cost of the interest as well as other fees, it would make more sense to go for a SIP-based mutual fund so that the amount you spend on a monthly basis is almost exactly equal to the amount you spend on investing. Given the uncertainty of the business environment, it would be better to invest in a diverse portfolio bearing a mix of equity as well as debt (with a higher leaning towards debt) rather than a high-risk portfolio.  

Takeaways

There are a number of lenders that you can approach in order to apply for a personal loan. But it only makes sense to ‘invest a loan’ when the return probabilities on the investment of the loan are higher than the costs, and you have a stable income source. Plus, the investor must ensure that there is no mismatch between the tenure of the personal loan and returns expected from investment as it will defeat the entire purpose.
 

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