Hello Sir
I have monthly sip of 6000 in axis midcap direct fund.
i live in joint family and i may come out of it anytime in near future(may be 1 year or 2 years) for which i require about 5 lakhs liquid fund.
currently i dont have the same.
Is it ok to take personnel loan of 5 lakhs and invest in currently running MF so as avoid running around in case of emergency.
for 5 lakhs of PL with interest of 11.25%PA for 5years ,
i will be charged interest of rs 3lakhs for 5 years .
ie i will be paying 8lakhs for 5 lakhs loan,
is it good idea to invest the loan amount in my MF As lumpsump as it would be giving me 17% annual returs plus the compounding interest ofexisting Rs 2 Lakh in the porfolio.
is there any other idea other than this?
kindly advise.
Ans: It’s commendable that you are considering ways to optimize your investments. Taking a personal loan to invest in mutual funds is a strategy that requires careful thought. Let’s break down the key aspects to consider:
Understanding the Costs and Benefits
Personal Loan Costs
Interest Rates: A personal loan with an 11.25% annual interest rate will result in significant interest payments over five years. For a loan of Rs. 5 lakhs, you would end up paying around Rs. 3 lakhs in interest, totaling Rs. 8 lakhs.
Repayment: The total repayment amount is considerably higher than the principal. This can put additional strain on your finances.
Investment Returns
Potential Returns: Investing in your current mutual fund, which has given 17% annual returns, could seem attractive. However, returns are never guaranteed and can fluctuate.
Compounding: The compounding effect on your existing Rs. 2 lakhs can be beneficial. Yet, this doesn't always offset the cost of borrowing.
Assessing Risk and Liquidity
Investment Risks
Volatility: Mutual funds, especially mid-cap ones, can be volatile. High returns come with high risks. A downturn in the market could affect your investment significantly.
Loan Repayment: With a personal loan, you must make regular EMI payments regardless of your investment performance. This could be challenging if your returns do not meet expectations.
Liquidity Needs
Emergency Funds: You mentioned needing Rs. 5 lakhs for potential emergencies. It’s crucial to have liquid assets readily available rather than tying them up in investments.
Alternative Options: Instead of investing borrowed funds, consider building an emergency fund through savings or more liquid investments.
Exploring Alternatives
Building an Emergency Fund
Savings Account: Keep a portion of your money in a high-yield savings account. This ensures liquidity and safety while earning some interest.
Short-Term Investments: Consider short-term, low-risk investments that can be easily liquidated when needed.
Reducing Dependency on Loans
Incremental Savings: Increase your monthly savings to build the required Rs. 5 lakhs over time. This avoids the interest burden of a personal loan.
Asset Liquidation: Review other assets you may have. Selling or liquidating investments could be a more straightforward approach.
Financial Planning Approach
Review Your Financial Goals
Investment Strategy: Align your investment strategy with your long-term goals and risk tolerance. Ensure that any move to invest borrowed money does not jeopardize your financial stability.
Financial Cushion: Maintain a balance between investment and savings to safeguard against unforeseen expenses.
Final Insights
Taking a personal loan to invest in mutual funds involves a high degree of risk and potential financial strain. The interest payments on the loan could outweigh the benefits of the returns from the investment.
It’s crucial to ensure you have an adequate emergency fund before considering such investments. Explore alternative ways to build liquidity without incurring high-interest debt. Regularly review your financial situation and investment strategy to align with your goals and risk tolerance.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
