My son has a fixed deposit of Rs 5 lakh for three years. I intend taking an overdraft limit of Rs 5 lakh against the fixed deposit with the objective of investing Rs 1 lakh each in five equity funds for three years. Would you instead recommend a SIP of Rs 25,000 on a quarterly basis ?
-Narinder Kalra
It is dangerous to invest in stocks on borrowed funds. We would strongly dissuade you from using borrowed funds for investment into a high-risk asset class such as equity. By doing that, you will load yourself with a higher interest payout than what your fixed deposit (FD) earns and in case the equity markets don't perform well, it can become quite a burden. Investors, who use borrowed money for investing in equities, usually have deep pockets and they too use different strategies for hedging the risk undertaken.
If you have a high risk appetite, a better option would be to break the fixed deposit (Rs 5 lakh, against which you want to take loan) and invest that money in the mutual funds identified by you. Alternatively, you can break your fixed deposit, and invest this capital in Post Office Monthly Income Plan, and create an SIP out of the monthly interest pay-outs from it. Though the amount invested equities will be lesser but this is a far better way to build wealth over long-term, even while keeping your Rs 5 lakh worth of capital safe.
This article was originally published on March 30, 2007.
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