I have the option of breaking a fixed deposit or taking a loan against it and investing it in
mutual funds. Which is a better option?
We would like to make our stance very clear - please stay away from investing borrowed money. Investors who use borrowed money for investing in equities usually have deep pockets and they too use different strategies to hedge the risk undertaken.
Apart from a loan against a fixed deposit (FD), many banks offer investment services where you can borrow money and they invest it in mutual funds for you. These funds are then liquidated on a quarterly basis to pay off your interest liability. Investment in a high-risk asset class such as equity is very capable of turning negative and eating into your capital. You could get saddled with a higher interest payout than what your FD earns.
If you have a high-risk appetite, a better option would be to break the FD and invest that money in mutual funds.
Alternatively, you can break your FD and invest this capital in a Post Office Monthly Income Plan and create an SIP out of the monthly interest pay-outs from it. Though the amount invested in equities will be less, it keeps your principal amount safe.
This article was originally published on December 20, 2007.
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