The Art Of Borrowing To Invest – How Do The Wealthy Multiply Returns?

Jaspreet is a property investor. He took a loan of ₹50 lakh at 9% interest per annum. He invested it in a commercial property offering a 13% return. This gave him a clear margin of 4% annually.

Over 10 years, this margin added up to a gain of nearly ₹29.5 lakh, without investing his own capital upfront. You can see how borrowing helped Jaspreet in growing wealth. 

Most of us look at loans as a liability. But for those who understand the art of borrowing to invest, they use it to build wealth. 

Why Do Wealthy Individuals Prefer Borrowing Over Using Personal Funds?

They treat money as a resource to be rotated, not hoarded. Borrowing allows them to:

• Claim tax deductions on interest in specific cases.
  
  
• Use their appreciating assets to secure funds without liquidating them.
  
  
• Keep their own funds available for multiple investments.
  
  
• Use the power of compounding on borrowed funds.

Practical Use Of Borrowed Money For Higher Returns

1. Investing in Real Estate

It is a popular route for long-term capital growth and rental income.

You can see that you can earn ₹1.75 lakh more every year (3.5% of ₹50 lakh), which grows further with compounding.

2. Business Expansion with Borrowed Capital

Misha is a small manufacturer. She took a loan of ₹20 lakh at 11% interest per annum. 

You can see that even after paying interest, Misha’s profit rises by ₹7.8 lakh due to scaling up production.

3. Stock Market via Borrowed Funds

Investors like you use margin loans to invest in funds or purchase stocks. Nidhi borrowed at 8%. She invested in equity mutual funds with an average annual return of 13%:

You might know that such a method carries market risk. So, you should only use it if you have a good knowledge of equity risk.

When Borrowing Makes Financial Sense?

You cannot borrow money for just some random purpose. You can consider it in the following cases:

How To Calculate The Return You Must Earn?

If you are planning to borrow to invest then you must know the minimum return needed to break even.

Formula: 

Required Return = Interest Rate / (1 – Tax Rate)

Example: 

So, if your loan interest is 10% then your investment must earn at least 12.5% before tax to be profitable.

How Compounding Helps When You Start Early?

You might have heard of the 8-4-3 rule. It is a simple rule:

• You should invest 8% of your monthly income.
• You should aim for a 4% annual real return (after tax and inflation).
• You should stay invested for 30 years.

Mridushi is earning ₹75,000 monthly. She invests 8% (₹6,000) consistently for 30 years at a real return of 4% which would build a corpus of over ₹1 crore.

If you start investing early, with your own or borrowed money, it makes a major difference. 

When Borrowing Can Go Wrong?

It is true that borrowing can help you grow health but only if you use it carefully. 

Final Thoughts

If you think that you can borrow only for emergencies then you are wrong. If you understand where and how to use it, borrowing can become a way to grow wealth faster. You have many possibilities like:

• Buying rental property
• Expanding businesses
• Investing in mutual funds

If you want to borrow then the main key is to borrow only when the returns exceed the cost and the risks are manageable. Before borrowing you must match it with a clear income or asset growth plan. So, you can build wealth from borrowing. 

FAQs

1. What’s the biggest risk of borrowing to invest?

If returns fall short, you still have to repay the full loan.

2. Are loan EMIs tax-deductible?

In some cases like home loans and business loans, yes.

3. Is borrowing against shares a safe option?

Only in stable markets and with proper margins. The risk is higher here.

4. Can I borrow to invest in real estate?

Yes, especially if it offers appreciation in value and rental income.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?