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Explainer: What to do if you need money? Take a loan or withdraw money from your investment? understand

Highlights

If you do not have an emergency fund, then you have to break the investment or take a loan.
It is wise to break an FD that gives 5% annual return and not take a loan.
You should always make an emergency fund for yourself and keep it with you.

New Delhi. When you need money for some urgent work, and you do not have money, then the only option left is to borrow. But what if you have money, but you have invested somewhere? Should you withdraw that investment? Or should you take a loan? Many people face this problem. Today we have brought a solution to your problem in this article.

Dev Ashish, SEBI Registered Investment Advice and Founder of StableInvestor, has provided the solution to this problem quite simply. We are living in front of you the Hindi translation of one of his articles published on Moneycontrol. This topic is so complicated, but Dev Ashish has told it to be very easy.

Dev Ashish says that it is generally best to remain debt free, but you should decide whether you want to take a loan or withdraw the invested money based on your need and various circumstances.

Also Read – What is Asset Allocation? How does it balance the risk and return in the portfolio?

Interest on Loan vs Return on Investment Maths
The first thing to consider is simple math. If you need money and have a Fixed Deposit (FD) giving 5% annual return, then it is not wise to take a personal loan at 12-15 per cent. In this case, you should use your FD only.

But what if you invested money in assets that could potentially deliver higher returns? Equity can give 10-12 per cent in the long run. So the question is, should such good investments be scrapped instead of taking loans?

It needs to be understood here that the possibility of higher returns is not as promised. Equities can give an average return of 10-12 per cent over the long term, but there is no guarantee. At least, you may not get this return year after year. So when you take a loan and your investment gives good returns, you will enjoy your decision. But if the market goes down after you take out your loan, then you will find the same decision stupid.

Type of Money Requirement VS Type of Asset
It has to be seen how important and how big is your need for money? And how big is your investment/asset that you are looking to withdraw?

Also read – Mutual Funds: Learn how to re-balance your portfolio, there will be no loss

Suppose you urgently need Rs 10 lakh for an emergency, but you have only one asset in the form of a property which is worth Rs 15 lakh. In this situation, you may have to take a loan, as selling land is a slow process.

On the other hand, if your requirement is small, like Rs 4 lakh, and you have the same amount lying in a bank FD, then it is advisable to use an FD. If you have not kept the same FD for any specific work in the near future.

In cases where the requirement is very small (like a few lakh rupees) and the available asset is huge (one several crore rupees), you cannot sell the property. In such a situation, loan is the only option. But if the investment is in something like a mutual fund (MF), then you can think of withdrawing some money from it. But while choosing the option to withdraw the investment, keep in mind the tax levied as well. Generally, there is a capital gain from the sale of any asset, which is taxed accordingly. So this thing should be kept in mind before selling.

Emergency fund can come in handy
You must have heard many times before that one should always keep an emergency fund for emergencies. If you have such a situation in front of you, then you can easily use that fund by withdrawing money. You would have kept this money in your hand for any such work.

Also Read – How To Become A Crorepati By Investing In PPF And NPS Schemes? Learn this calculation

Having an emergency fund eliminates the need to withdraw your long-term investments and also does not hurt the compounding effect. If you do not have an emergency buffer, and if the emergency comes at a time when the market is down, you will be forced to book a loss for your position. And by staying in long-term investment, your financial goal will also be disturbed.

better to analyze
In short, if there is really a critical emergency, you have to do what is in front of you. In an emergency, taking an online personal loan can be the fastest option. Hence, one can first go for it and later repay the loan by eliminating the investment. But in most of the questions on investing vs taking loans, a cost-benefit analysis should be done before you decide whether you should liquidate your investment or go for a loan.

Tags: business news, Business news in hindi, Investment, Investment and return, Investment tips, loan

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