An Investor Borrowed Rs 1.5 Lakh To Buy One MRF Share — Here's Why That's A Bad Idea

Many retail investors in India have been dazzled by the superlative returns some have managed to receive by investing in the stock market. While the market as a whole has given up gains in the recent past, individual stocks have still managed to make investor wealth sky rocket.

But the lure of such wealth creation has caused some investors to make unfortunate decisions. One such decision is taking a loan to buy a share or to trade.

A viewer query that came in on Friday on NDTV Profit's Ask Profit show had quite a few knots to untie when it came to the way the investment was made.

"I am a first-time buyer and have been investing for a year. I've taken a personal loan and invested in MRF. I am very interested to invest, so I took a loan to invest in the share," said the investor.

Now, despite the interest and the hopes of good returns, taking a loan to invest may not be a good call. This is not simply based on the risk that is involved, but also the need for financial discipline.

"A perfect disaster is brewing with this. The basic principle is to never put borrowed money into the stock market. One can put what one can afford. There is no guarantee that market returns will be positive. If one likes to invest in the stock market, one could have started saving earlier and invested," said Gaurang Shah of Geojit Financial Services.

This being a bad idea is also substantiated by the issue that will come with interest on the loan and one will end up paying a lot of interest.

"Though it is a strong company, it is a lethal call," said Shah.

The investor took a personal loan, which doesn't require collateral. But even loans that are taken against a security for the purposes of trading and investing are a bad idea according to Nikhil Kothari, director at Etica Wealth.

"Loans make the margin of requirement increase. Selling the shares at a loss is what can happen if one has to pay off the loan or collateral," he said.

Essentially, the gain the investor is hoping to make with this big risk might not pay off as well as they might expect. The volatility and unpredictability of the prices plays an impactful role as well.

"The day stock prices go flat, the interest bites you. Even if you go for a forex loan, there are other issues that come with those options as well," he said.

Effectively your gain will almost always be narrower than the loss that one stands to take as the loan interest will complicate the call despite how strong the stock is. It's recommended to invest money that has been saved up into the market in a staggered and systematic way, rather than taking such risky calls, the experts said.