Loans vs Investments

         

A person who is new in the finance world is always confused what is good .. an Investment in equities/bonds or a loan.

Some people even take personal loans just to make investments in equities, some people take heavy housing loans as they are cheaper then others and put their spare money in the other investments like FDs, Equities and even buy more property.Let's take a brief look where it is good to have loans where not..

1. Whenever you take a loan first of all ensure you have enough liquidity for your lifestyle/ liabilities (annual premiums, school fees) to pay. Also you should have enough emergency corpus to deal with some emergency. Not having enough liquidity can create a lot of negative stress and make your life dull.


2. Now should we take loans for investments.. My straight forward answer is NOOO... Why..

1.  Housing/Home Loans
   
   
   
   • People always say on Housing loan they save tax.. but how much. Only on interest of 1.5 Lakhs and from Fy 15 its 2 Lakhs. In that case make sure your interest on loan should not be more than 1.5 /2 Lakhs..after that it is liablity.  However if you are taking loan for 2nd house for investment/living purpose then you can claim the tax rebate on the entire interest component of the 2nd house but try to minimize the interest on 1st loan but do not finish it. This can turn out to be a very good loan if it does not disturb your night's sleep.
   
   
   • Other segment say if we take more house loan to buy some other assets like plots/shops etc.. we can do if the investment is feasible and looks promising but keep the Point 1 in mind.
   
   
   • I still would say we should avoid preferring hefty house loans of long tenures and putting your spare money in investments because if I consider a normal interest rate of 10% PA. Now see we are paying a guaranteed return of 10% on the amount that is above 1.5 Lakhs PA limit, and at least 7% for the rest. But there is no tax free liquid , secure investment in the market that give you such a guarantee. If you take bonds then they will only give high interests in the interest prices rise and then your HL interest will also rise. On equities you have no gurantee for that. Say if you earn the optimal 12% on equities then effectively you have earned 2-5 %, but if you have -ve returns then you loose  10% + the -ve returns .So see the risk to reward ratios. These days so called investment advisors show people the returns from MF's/equities/ULIP's markets before 2008 era or 2010 where market were booming.. but this is not guaranteed as markets are now attached globally. This point will be valid for the other loans as well. Do your investments wisely. If you take historical data since the beginning of  SENSEX just  check the avg. rate of return annually.


2. Auto Loans
   
   
   
   • Here is again the same case. Some people take good amount of loans to show off their status. These loans are bit costlier than house loans and autos are a depreciating asset as compared to as home where property appreciates in long term.


3. Personal loans

Never get into these as

• They have very high interest rates.


• Always have some prepayment penalties.


• No reward in any terms.

Never go after or consider any banker's call .

"It is better to learn late than never"

Happy financing

Kamal

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Disclaimer

These are my own views not a judgement or guidance. So please use your own instinct before taking any decision.