This investing strategy has shown to be successful in a number of IPOs, resulting in better returns for investors. However, things are changing, and they are changing quickly.
Investors who seek to earn a fast buck by following this revenue model face increasing danger as interest rates rise. And true turmoil in the financial markets, as well as a scarcity of high-quality initial public offerings, haven’t exactly helped.
Let’s have a look at some figures. The cost of financing was roughly 10%-12% a year and a half ago. These figures have shifted substantially northwards.
Why do investors consider taking a Personal Loan for investments?
Investing borrowed money in securities, such as stocks, mutual funds, etc. is called leveraging. There are two schools of thought when it comes to ‘leveraging’. Some investors strongly believe that leveraging is beneficial to earn higher interest in a short duration, whereas others believe that it is a highly risky affair.
Benefits of a Public Offering (IPO)
- A large number of shares are allotted to you at once.
- You have the chance to invest in a firm with a proven track record of success.
- You may be able to obtain shares for a drastically reduced price at first.
- A firm listed on the stock exchange normally experiences an increase in share prices after allotment of shares through an IPO, and while this isn’t always the case, it usually is.
- You have the option to invest in a company that has the potential to develop rapidly in the future, ensuring that you will see a positive return on your investment.
Taking Loans for IPO Investment
HNIs (high net worth individuals) frequently borrow money to invest in initial public offerings. Other people may decide to take out a loan to participate in an initial public offering. In most cases, an IPO is issued without warning and with a deadline for applying. Some people may want to apply but are unable to do so due to a lack of cash. As a result, they require financial assistance. Investors pay a portion of the price of the stock and banking institutions cover the remainder through IPO loans. Although loans enable investors to engage in more lots and provide significant leverage, borrowing money is the same as taking out a loan. Short-term loans with payback terms of up to three months are available.
As a result, if you want to take out a loan to support an IPO investment, be sure you have the money to pay it back on time. You should be aware that when you repay the loan, you will have to pay interest (almost 8%).
Invest in Initial Public Offerings (IPOs)
You may register a Demat account with a reputable brokerage, but you may discover that you lack the capital to invest. If you have enough money, an IPO is a wonderful investment. It is also good for you to take out loans if you are certain that you will be able to make interest-bearing repayments and avoid needless debt.
Reasons why investors consider taking a Personal Loan for Investments
- No Restriction on the End-Use:
Many loans come with a specific purpose for which the loan amount can be utilised. For example, if you take a car loan, you can utilise the loan amount only to buy a car and not for a vacation. However, there are no such restrictions on the usage of a personal loan. A borrower is free to utilise the personal loan amount for almost anything, as far as it is legitimate. So, you can use this amount for your child’s education or wedding, home renovation, buying an expensive item, or investing it further to earn returns, etc.
- No Requirement of a Collateral:
As personal loans do not require any security to back up the loan, there is no risk of losing the asset or collateral if you are unable to repay the loan. For example, if you avail of a Loan Against Property or Loan Against Securities, such as shares, mutual funds, life insurance policy, etc., then the lender holds the right and has the authority to sell your property/security to recover the due amount.
- Quick and Easy Loan Process:
Investors usually require funds immediately, especially if they are investing in a stock market. In this case, Personal Loan can provide them with funds in a quick and easy way. Other types of loans require a property valuation, evaluation of a financial instrument, which can take time and can delay the loan process.
- Maximum Capital:
More the money you invest, the higher will be the returns you earn. Therefore, many investors prefer to borrow money to earn the maximum returns in a short duration. A personal loan can be offered up to a maximum of Rs 50 Lakhs, depending on your profile and repayment capacity.
What are the cons of utilising a Personal Loan amount for investment?
- Risk of Capital Loss: There is always a chance that money invested in stocks, mutual funds, Initial Public Offerings (IPOs), or other equity-related financial instruments will not provide projected returns or, in the worst-case situation, you will lose all of your money.
- High Rate of Interest: If the rate of interest on the Personal Loan you have taken is too high, you may not be able to make enough money to repay the loan in the time allotted. Furthermore, because personal loans are typically issued with a fluctuating rate of interest, the interest rate may increase at any point after the loan is taken out.
- Short Loan Term: Personal loans are normally for one to five years. You will not be able to repay the loan amount within the loan period if you are looking for long-term gains. Furthermore, the cost of a personal loan rises dramatically as a result of the high rate of interest and processing charge, which is impossible to obtain through short-term investments.