With equity markets hitting all-time highs, a number of investors are raising their bets to make the most of the ongoing rally.
Some investors tend to go overboard and borrow money at high rates of interest to be able to invest so that they can laugh their way to the bank.
The only speed-bump in this strategy is that it may not work at all. After all, markets – as we all know – are profoundly unpredictable.
In the famous words of ace investor Warren Buffett, “In the short run, the market is a voting machine but in the long run it is a weighing machine.”
Investment advisors usually advise against investing in the market with the borrowed money. Regardless of what trajectory the market is taking or expected to take, investments are meant to be made with the earned money and not the borrowed money.
Uncertain returns
To assert this point, Amol Joshi, founder of Plan Rupee Investment Service, says that the rationale behind this is simple. Interest rates on loans are confirmed while market returns are not. So, one should stay away from loans for investment purposes.
“It (borrowing to invest) is totally not advisable. In case of loan, interest rate is guaranteed but the market returns are not guaranteed,” Joshi says.
One might argue that if you want to make the most of the current bull run since the general elections are around the corner and the market could spike in the coming year, then what option does one have but to borrow and invest, particularly when one doesn't have access to a lot of funds?
To answer this, Joshi says, “If you don’t have your own money then you should stay away from investing completely. And as far as projections are concerned -- be it elections or something else — they are all uncertain. Equities, by nature, are a long-term asset class and there is absolutely no point in investing in them with a short-term perspective based on speculations. What if the market crashes the next day, the way it did in 2008. That time, Sensex declined 60 percent from 20,000 points to 8,000.”
Sridharan S, founder of Wallet Wealth, too says that borrowing and investing are not a good idea.
“Personal loans charge an interest that ranges between 12-18 percent. Markets, on the other hand, do not deliver confirmed returns. And if the markets go down by 10 percent, someone who has taken a personal loan will lose 30 percent of their capital. So, definitely, borrowing and investing are not a good idea,” says Sridharan.
While speaking about the debt instrument, he says: “No debt instrument will ever deliver more than the borrowing rate. So, investing in a debt instrument with the borrowed money is not a good idea either.”
Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors, says, “Equity markets are typically long-term investments and can go through long periods of below par performances as returns from equities can be lumpy. Since a loan tends to have ongoing interest costs associated with it, borrowing to invest is not suggested.
To sum up, market returns are unpredictable and investing with borrowed money, therefore, is not advisable at all. The interest rate charged on personal loans is usually too high, higher than the long-term returns delivered by markets.
