Is it a viable option to opt for a loan against mutual funds or equities?

Debt (a loan is a form of it) is used to fulfill some requirements which can be buying a home, car, paying for tuition, renovating their workplace, etc.

Debt: A way to meet our needs and wants

This instrument needs to be used wisely as it can suddenly lead to a lot of issues like

  1. Reduced money in hand
  2. Depreciation of Asset (like a car) owing to the time value or inflation
  3. An increase in the floating rate of interest can lead to the evergreening of loan payments (payday loans in the US)

Owing to this, loans can become a shackle that many do not understand and repent after getting into. It is best to follow some steps

  • Budget Expenditure
  • Save as much as possible
  • Spend on need
  • Borrow when terms are favorable to you
  • Monthly repayment towards loans should not exceed 20% of your monthly income

Now, let us come to the question:

Is it a viable option to opt for a loan against mutual funds or equities?

Query from a loan seeker

So, we need to understand that this option is being promoted by many financial institutions in order to increase their loan book.

This seems lucrative as no cash is exchanged from the borrower but it can be detrimental as

  1. Equities in the short term are meant to be volatile that can lead to an increase in the amount pawned for raising funds
  2. Mutual Funds (Equity-Based) are less prone to high volatility but they also can increase the allotment needed in a bearish market
  3. Mutual Funds (Debt-Based) are stable assets and can be taken into the category of bonds, fixed deposits, and gold bonds. Despite this, the quantum requisite for raising the funds will be higher

So, if you are thinking of pawning your financial instruments to raise funds to meet your need, make sure that the quantum of funds is manageable(in case of contingency) and it does not turn into a trap.

Debt: Instrument of Growth or Trap?

Few Platforms for tracking Expenditure/Saving/Payments:

Hope this helps

You can follow my blog or Facebook page on investing for getting insight into other stocks.

Also, if you are planning to date someone, this book might help.

Happy Investing!!

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