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Mahesh Mohan | Does it make sense to take a loan and then invest that in Fixed Deposit? |
Hello,
I just want to know whether it makes sense to take a loan and then invest that in Fixed Deposit... assume that i have no problem with EMIs... Suppose I take a loan for 5,000,00 for ONE year at the interest 11% which accounts to an EMI of Rs. 44191 X 12 = Rs. 530,292 That is we pay an interest of Rs. 30,292...
Now suppose we invested our loan amount of 5 lac in FDs which earns an interest of 8.75% (compounded quarterly) so that it will become Rs. 5,45,207 after one year... WE GAIN Rs. 14,915
And for your information am not going to do the above I have already invested some 3 lacs. in stock market now I want to take some loan so that in case the market goes to say 15,000 levels or below i want to buy more stocks... and if it goes up then i will close the loan...
Does it makes sense? What do you say?
Additional Details
Forget TDS... its just a case study... assume that I wont earn more than 10,000 as interest from FDs.... |
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CaptAnil
|
No sense ! You forgot the TDS ! |
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Priyanka M
|
no........... it makes no sense |
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zygote222
|
My calculations indicate that you made some mistakes in your figuring. You seem to have dropped a decimal place somewhere. A 5000 loan at 11% interest for one year would require monthly payments of 441.91. That's a total payment of 5302.92 or a total of 302.92 more than the amount borrowed.
If you invest the 5000 at 8.75% compounded quarterly, you will have 5452.07 after one year. So at first glance it appears you made a small profit of 149.15.
The problem is that you are paying off the loan every month, so you don't have use of the 5000 you borrowed for a full year. Every month you need to come up with the 441.91 payment. For example, after the first month's payment, the net amount you have borrowed shrinks to 5000 - 441.91 = 4558.09. On the other hand, your calculation of making 452.07 on your 8.75% investment requires you to leave the entire 5000 invested for a full year. Your calculation of a profit requires you to simultaneously be paying off the loan in monthly installments, but also keeping the entire 5000 for a full year in order to earn the maximum interest. Money doesn't work that way. Either you have the money or your lender has it, not both at the same time.
So in reality you will lose money if you borrow at 11% in order to invest at 8.75%. |
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Ruchir S
 |
Here the assumption is that the interest rate is applicable on a reducing basis with each EMI. if you consider a flat rate of interest of 11% then you end up paying the difference which is more. Also I doubt you will be able to take this loan for making an FD !!!!! |
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chirag
 |
TDS will reduce your effective yield and wipe out whatever gains you might get... And if the amount is larger, you will have to show the interest income in your Return. which *may* push you into a higher tax bracket.
if as per what you say ignore TDS and investment returns are from the stock market. Yes, it applies. Then you are bear the investment risk.
BTW the term Carry Trade only applies, if you are switching currencies. |
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dad_to_be (is now a dad)
 |
If the scenario works exactly as you decsribed (the FD scenario) then yes.
However, it may not because of:
1. There are likely to be loan origination charges for the loan.
2. You are assuming you can get a personal loan at 11%. The rates are not that low currently.
3. If your interest from all sources crosses Rs. 10K.
Taking a loan and investing in stock market?
What you are suggesting is a good idea but according to RBI regulations you will be breaking the law if you take a personal loan to invest in the stock market. The agreement you sign will cover this scenario.
I'm not saying that you will suddenly have investigators all over you but it's just a thought to remember. |
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Joe
|
If you have 500000 at 11% simple interest you will pay .11 X 500000 = 55000 in interest. If you invest it at a simple 8.75% you will make .0875 X 500000 = 43750. So you pay 55000 and make 43750 for a loss of 11250.
The calculation is slightly different if you consider compound interest, but only slightly. You still lose money. |
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chaand
|
Yes very much. Everything here is gambling. Take a chance & go ahead. At the end of it you may lose or gain some meagre amount or who knows ....... |
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doreen_martel
 |
I would not think that it would be beneficial unless you were trying to do the following:
A) invest 100% safely
B) repay the loan nearly immediately
C) Establish a credit history
Personally I think this is risky - what happens if your financial status changes and you decide that it's 'ok' to dip into this 'nest egg' for everyday living expenses.
Steady, diversified investments that show growth are probably a better alternative for you. I see little (if any value) in borrowing money to sit in a fixed deposit.
If you're interested in getting involved in some stock talk, world markets or other aspects of finance, join us at http://www.fingad.com
Cheers! |
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vbulls
 |
hi,
there are two factors:
1. buying rate (the interest charged by your lender)
2. FD rate (interest assured in FD) (around 8-10%)
most of the time FD rate is less than the buying rate. so amost no profit at all.
compounding: very meagre difference. longer the period profit is more compunded.
if you borrow money in US and invest in India you will get difference in rates (which is profit)
YOU CAN INVEST IN MUTUAL FUND (equity funds) which is profitable in long term like 5 years. risk is less.
http://vbulls.com/ |
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xtremely xtra
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how will you pay EMIs?
Otherwise it happens - get it at low rate and give it out on higher rate. |
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Anyonya K
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It all depends on your intention.
If you feel proud of your social service, that you patronage by paying for the part of salary of the bank employees, its one of the good ideas. But, for sure part of your social service will go to the common employees and a part will go the Bank's profits. Even in that case, some banks will have some funds put into charity activities. Please go ahead. And if you are capable of taking more loan, better you do it as well!! |
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B R
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J U S T DO I T ,,
ITS CORRECT, |
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