In the past few weeks I was wondering whether it makes sense to take a Loan from the bank and then invest that money in Fixed Deposits. Today, I asked the same as a Question in Yahoo! Answers which is a good portal to get immediate response or answers from users all over the world. And I was right I got pretty good responses in minutes. It was a mixed response some said YES and some said NO.

Consider the following case and assume that I don’t mind paying monthly EMIs and there is no processing charges for the loan and no TDS is applicable for me as the total interest earned in a financial year is less than Rs. 10,000 so I don’t have to pay any taxes.

Suppose I take a loan for Rs. 100,000 at the rate 11% for 12 months or one year which accounts to a monthly EMI of Rs. 8,838. So that at the end of the year I would have paid Rs. 106,056. So I paid Rs. 6,056 as interest charges. Now what if I invest my loan money (of Rs. 100,000) in a Fixed Deposit (FD or CD) which offers an interest rate of 8.75% compounded quarterly? At the end of 12 months I will earn Rs. 9,041 as interest. So the net gain would be Rs. 9,041 - Rs. 6,056 = Rs. 2,985.

If you think that I’m crazy then for your information I am not going forward with this plan. I planned like this just to take advantage of Stock Market volatility. I’ve invested around Rs. 300,000 in stock market but at the same time a bit worried about the current volatility in the stock market. Some analysts and bankers told me that don’t enter the market now as it may go down to 12,000 levels. But I don’t want to stay away from the market and want to remain invested in it. So I planned this way either to take a Loan Against Shares or Loan Against Security. But right now getting a Loan Against Shares is difficult due to market volatility but getting a personal loan or loan against security is much easier. But what if the market stays at current levels? I will be losing money ‘because of interest charges. So I thought like this and I feel that does makes sense. What do you think?

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