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Loan repayment vs equity investing

Author: Balaji Rao/Wednesday, May 9, 2018/Categories: Loans, Expert View

Loan repayment vs equity investing

When it comes to convincing individuals about choosing equity (stocks/mutual funds) for long-term (ranging from 5 years to 25 years) it is easier said than done. Almost every individual uniformly thinks that equity is risky. Interestingly, the same individuals are completely alright to avail long-term housing loans that span from 15 to 25 years of repayment schedules that invariably carries about 150% of interest component by the end of loan tenure.

These borrowers are highly optimistic that (a) they will live for these many years, (b) they will have employment through the loan repayment duration, (c) their income flow will remain unchanged, (d) they will successfully pay their EMIs and clear the loan by the end of the tenure.

On the other side, there is the lender (bank or a financial institution) who also is as optimistic as the borrower because the former too thinks that latter would have the capabilities to repay the loan and the value of the asset will be higher than the loan value in the future years. So we have two entities at two vantage points who are extremely optimistic of payment and repayment.

The million-dollar question now would be who offers these borrowers the financial capability to repay his or her loan over the next 20 or 25 years? What makes the asset value rise over the same period so that the lender feels safe?

If the economy does not do well, can the borrowers have employment? If their company/business is not doing well, will they be capable of the cash-flow to clear the loan? If the economy is not doing well, does the value of the house rise?

This is absolute hypocrisy; the success of an individual’s financial capability is hidden in the success of an economy which cannot be ruled out. Assuming one million 30-year-old individuals avail themselves of Rs 40 lakh housing loan each for a period of 20 years with an EMI of Rs 34000, unless an economy is not doing well it would be impossible for them to successfully repay the loan over these years. A successful economy offers such possibilities and such possibility can be measured through the stock market performance, since almost every company is listed on the stock exchanges that makes a difference to our lives because we invariably use their products or services.

It would be foolish to think that over a long-term, equity market is risky, because whether we like it or not, believe or not, and invest or not, we are very much living and surviving inside such possibilities and that’s what has been happening for a long time and with all optimism, I believe it will continue to happen. Think before ignoring equity as part your overall investment plan.

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Balaji Rao
Balaji  Rao

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