Often, we hear investors asking the question “Can I take a loan from a bank to invest in mutual funds?”. In this video we have listed the risks and advantages of taking a loan to invest in mutual funds. Investors must be careful of risks such as
1. Inflow-Outflow mismatch – the returns from mutual funds are not linear or guaranteed. However, EMI’s need to be paid regularly. This causes a mismatch.
2. Debt trap – The above-mentioned mismatch causes the investors to refinance their loan, hence falling into a debt trap.
On the flip side, there are certain advantages of taking loans to invest such as leveraging. However, only under certain conditions is the idea of taking a loan to invest justified for seasoned investors.