Portfolio Leveraging
The concept of borrowing funds through mutual fund (MF) ‘portfolio leveraging’ has recently started gaining ground. An increasing number of high net worth individuals (HNIs) having size able holdings in mutual funds, are borrowing money through portfolio leveraging.
Investors prefer non banking financial firms (NBFCs) over banks to raise money since banks cannot lend more than Rs 20 lakh with MF portfolio as collateral. NBFCs sanction up to 70% of the portfolio as a loan which investor again invests more often buying out MF units and not stocks! It is mostly risk averse investors who invest in mutual funds. It is strange to see why such a conservative investor wants to take an additional risk by leveraging his portfolio.
For portfolio leveraging to be attractive, the rate of return an investor is making through MFs or stocks in which he has invested borrowed funds should cover smoothly the cost of leveraging. For instance, if the investor is borrowing money at 15%, he should at least be making 20-22% plus on those borrowed funds!!
When market stages near one sided rally, portfolio leveraging seems to be the easiest way to maximize returns. With present uncertainty in sustenance of current government, turmoil in the global equity markets and when oil & energy prices set to shoot up, making money through leveraged positions didn’t remain a one-way street………………..
Investors prefer non banking financial firms (NBFCs) over banks to raise money since banks cannot lend more than Rs 20 lakh with MF portfolio as collateral. NBFCs sanction up to 70% of the portfolio as a loan which investor again invests more often buying out MF units and not stocks! It is mostly risk averse investors who invest in mutual funds. It is strange to see why such a conservative investor wants to take an additional risk by leveraging his portfolio.
For portfolio leveraging to be attractive, the rate of return an investor is making through MFs or stocks in which he has invested borrowed funds should cover smoothly the cost of leveraging. For instance, if the investor is borrowing money at 15%, he should at least be making 20-22% plus on those borrowed funds!!
When market stages near one sided rally, portfolio leveraging seems to be the easiest way to maximize returns. With present uncertainty in sustenance of current government, turmoil in the global equity markets and when oil & energy prices set to shoot up, making money through leveraged positions didn’t remain a one-way street………………..
posted by rahul kulkarni at
12:05 AM
2 Comments
