Do you have an adept knowledge about managing your investment loans properly? Taking an investment loan can be a great way to fund your portfolio growth, once you spot the opportunities for a long term investment. Yes, borrowing money to make more money essentially. But do you really know how to ensure proper management of your investment loan?
We may not have the excess funds to fund our investments for a better rate of returns than the CPF or inflation rates we are often subject to. This is why we need to take an investment loan to hope for better growth of cashflow into our pockets. As a general rule of thumb, the rate of return on the investment you fund must be greater than the interest rate of the loan. However, not doing a proper management of the investment loan in case the investment does not work as much as you wish for can be akin to gambling.
An investment loan to fund your investments can not only give you a lucrative cash flow with realised profits. It also provides leveraging opportunities if you invest beyond a certain threshold limit. Some products such as derivatives and currency pairs are good examples of leveraging which you can utilise your investment loan to do so.
With a proper use of your debt, you can certainly accumulate wealth on your investments. But it may take years in order to achieve the dream. You must not jump straight into an investment and be tempted to take an investment loan for it if you do not do a proper due diligence.
Leveraging as aforementioned comes with leveraging risks. This multiplier effect can augment your income fast, but it can also magnify your losses on the flip side. You may even lose more than 100% of your investments (such as CFD, futures and options) if you are not being careful. As the investment loan comes with additional interest charges and loan fees, this more than 100% loss only grows your debt wider. Even if your gains are not realised, you still have to service your loan commitment.
Before you even consider an investment loan, you have to ensure the effective interest rate of the loan is manageable. Is the expected rate of return going to be higher than the effective interest rate of loan? We cannot guarantee that but you have to do the comparison of the loans according to their effective interest rate and fees charges and ask your financial advisor or stockbroker if it is even worth taking up an investment loan for some particular financial instruments you wish to play.
To do better prudence on your investment loan management, do a more in-depth research on the market conditions, including the economy, stocks, currencies, cryptocurrencies, commodities and many more. As said, check with your professional advisor how to play and win so that you can maximise the fuller potential of your investment loan.
Also, check the repayment terms on the investment loan. Do ensure they are favourable and inspect if there are any catches in the fine print written. Read more about investment - https://en.wikipedia.org/wiki/Investment
