subject: Why You Should Not Buy Mutual Funds With Borrowed Money [print this page] Are you in the habit of buying units of Mutual Fund Schemes with borrowed money? Have you always gotten lucky and have, so far managed to a carve out a smart return after meeting all your obligations? If you are a full-time trading investor, then, that is all right, because in that case you probably have a feel of the pulse of the market (though it is easier said than done!) But if you are primarily into Mutual Funds, Insurance Policies and FDs, there could be trouble ahead...
First of all, if you invest borrowed money into Mutual Funds, it is very tough to get real gains. Funds rarely grow at the same pace as stocks and your margin would be thin. Your real gains will be the left over money (if any) after you repaid the borrowed money with interest. If you are very lucky may have success with it but for others it could be a nightmare.
With Mutual Funds, one needs to hold the units for the medium to the long term The stock markets are really volatile and since they directly affect the mutual fund prices, the fund holder needs to be ready to re-adjust the time-frame of his personal portfolio from medium to long and vice-versa depending upon the broad market trends. This is going to be particularly difficult if one is investing with borrowed funds as with borrowed money one do not have the option to hold them for so long, because of the payment/interest obligations. This puts the unit-holder in an added pressure in a volatile market as he hastens to sell his units even at a loss.
Dont let this happen to you. Remember, it is always safe to put into mutual funds the money which you feel wont impact your life terribly, even if you should lose it. So, even as you hope for the very best you are in fact prepared for the worst, should it happen.
