POSTED BY October 9, 2012 12:03 pm COMMENTS (31)

ONHi

My father in law taught me an exellent idea of investment through Bank fixed deposit.

Make a FD with bank and take loan on that FD and re-FD that loan amount.Repay that loan within a year and take another loan & repeat the cycle.

Eg:Make a FD of 50K with any bank. Interest,take for instance is 8%. Take a loan of 30K on that FD after few days and make another FD of 30K with bank @ 8%. Bank used to charge 2% extra on loan amount ie 10% in this case. I will be paying 10% interest and other side earning 8% on FD.So net impact of loan is 2% only probably cheapest in world.Also my networth increased from 50K to 80K.

After repaying the loan in a year. I can again opt for 30-50 K loan & repeat the cycle. I feel this very attractive option & safety is exteremely high.Such small saving plan may yield better fund in future & house wives can be invloved for these activities & formalities with bank.

Would request you to suggest your view.

Tax implications aside (as author has done), if you invest 50000 in FD for the 1st year and add 33000 every subsequent year (upto 10th year) to the FD and 33000 at the end of the 10th year (as the author has done), the total investment would be 3,80,000 at the end of 10th year (same as the author of post, at the same timeline), the total return will be 586002.8112 (assuming 8% for FD each year) which is Rs. 8692 more than the spreadsheet calculation. No loan or any complication required.

Ramesh,

What I inferred from the Excel sheet uploaded by Dharamesh

Initial 50000 FD at 8% for 10 years – Maturity amount – 1,07,946 – Interest earned – 57,946

Subsequent 30000 FDs can be considered equally like a RD with 8% invested every year for 10 years

Maturity amount will be 4,69,364 – Interest earned – 1,69,364

Total Maturity amount – 1,07,946 + 4,69,364 = 5,77,310

30000 Loan every year, paid yearly will have outgo of 3000 Rs per year which comes to 30,000.

Invested amount – Initial FD + Subsequent FD + Interest Paid = 50000 + (30000*10) + (3000*10) = 3,80,000. So net surplus – 1,97,310.

My Take, FD cannot be a good strategy to make money when we have more better options to make money. That’s also why i pointed the taxation issue which decreases the difference amount. Once people start to move their equity part to debt as part their strategy, they can make use of this on case by case basis.

The strategy is mathematically correct in my opinion but depends on many issues like better investment avenues, banks being dumb in providing 10% loan on their own FD, difficulty in management and FD taxation.

But very strange to see many people got confused by having an idea as N% Loan = N% FD.

N% FD may/always give better return than N% Loan outgo. That’s why there is a huge difference in the percentages offered for the term deposits and the personal loans. Housing Loan Interest rate is a different topic altogether.

Biswa Singh quoted “8 lakh loan at 10% per year would be – 8,80,000. So here he has a loss around -14,000.”

TheZionView quoted “Loan 80000 at 10% for 1 year you pay=88000”

Loan is different from FD rite? FD is compounding interest and Loan is Amortized Reducing Interest. Interest earned from 8% FD is higher than Loan interest paid for 10%

8 lakh FD at 8% is 8,65,945 maturity amount

80,000 FD at 8% is 86,594 maturity amount

8 lakh at 10% is 8,43,992 with EMI 70331

80,000 at 10% is 84,399 with EMI 7033

Ok i get it now

The difference this create is in having the money of extra 30000 every year in your hand and repaying the loan at the end of the year makes the difference and compounding this effect to period of 10 years will have significant difference in the final return.

Its just that its too cumbersome to execute and poses the Interest risk in falling interest market.

Also in your initial comment, how you conclude that your networth has increased from 50k to 80k ? You also have the liability of 30k , so your networth stays at 50k only ! .. Just that due to cash flow in future , your networth will increase

Manish

Dharmesh

Let me give you my views . I can see that this whole strategy is not going to make any monitory benefit , the interest rates paid by you is higher than earned .So from money point of view I cant see much benefit .

But the biggest benefit of this whole thing is that you are creating a structure and just because it gives you a sense of structure and percieved benefit , you are motivated to save more and more money due to this strcture and thats one big reaons you are able to save more money . If this structure was not in place , you might not have done anything and instead would have used the money somewhere else.

Even though there are other good option , because you seem to be a Secure and Safe investment person , you would have just put your money in saving bank accout or would have spent it .

So the contribution of this structure is on your discipline part and from that way you might want to go ahead !

Manish

Dear Manish

Thanks for your valuable feedback on this. You are 100% right that this scheme develops investment habit which is safe & secured. But as you said monitory benefit is not there in this scheme, i have made a small calculation over a period of 10 years. Benefit is there. Pls check my calcutation details in below link

https://docs.google.com/spreadsheet/ccc?key=0AkgKsdh6uEnkdElaVFVSV1I4QkJ6cWE3TklMVnJZV2c

Pls suggest if i have calculated any thing wrong in this

Regards

Dharamesh

Hi,

I don’t have good knowledge in F.D Relative issues. But here my doubt is which bank giving loan on F.D With just 10% interest ?

Thanks,

Sekhar

Dear All

I am not able to post my presentation here in excel format. You all are calculating this as short term plan for one year and finding no benefit. If you wish to get my calcutation based on 10 year may give your mail id so that i can send to you. my mail id is chawda1975@gmail.com

Share it from your google drive account, and paste the link. you can set it to be only view, and not editable.

Thanks Ramesh for the suggestion of positng my calculation. Pls check the same in below given link & give your feedback

https://docs.google.com/spreadsheet/ccc?key=0AkgKsdh6uEnkdElaVFVSV1I4QkJ6cWE3TklMVnJZV2c

Regards

Dharamesh

it seems that your bank will never ask for the principal amount of the loan. Is that correct?

if it is too good to be true, then usually it is not.

It seems you have not properly scanned my calculation. If you see total investment i have taken over a period of 10 years is Rs 380000 which includes 50000 initial investment , 10×30000 = 300000 loan taken every year & paid back to bank & intrest on loan Rs 30000 paid to bank. After deduction of all profite of Rs 197310 is calculated. You need to repay loan every year and no question of outstanding principal.

This means, at the end of the first year, you should have 86400 – 30000 (in the sheet, you havent mentioned about paying back that amount).

No it will be 86400 only as Rs 30000 need to pay from your other regular income as further investment. I have already mentioned in my initial discussion that every year loan need to be paid back to bank. It does not mean that you wlll pay back from FD maturity amount. This scheme builts regular investment habits in secured manner.

Ok, so it is 50k in first year and 30k every year. Calculate the same thing, without this loop-and-hoop scheme.

first year’s iteration:

50k gives you 8% interest amount=4k. At the end of first year, you will have 54k+30k=84k.

Also, you have a net gain of 3400, but your FD value is 86400. The balance does not match overall, which means something is wrong.

Investment Loan Total FD FD Intrest @ 8%Loan Intrest Net ReturnTotal FD Value

50000 30000 80000 6400 3000 3400 86400

86400 30000 116400 9312 3000 6312 125712

125712 30000 155712 12457 3000 9457 168169

168169 30000 198168 15854 3000 12854 214022

214022 30000 244022 19522 3000 16522 263544

263544 30000 293544 23484 3000 20484 317028

317028 30000 347027 27762 3000 24762 374790

374790 30000 404790 32383 3000 29383 437173

437173 30000 467173 37374 3000 34374 504547

504547 30000 534547 42764 3000 39764 577311

Total Investment in 10 Yrs 380000 (50000+30000*10+30000 Loan Intrest)

Total return 577310

Net Surplus 197310

Dear All

It seems you all taking this scheme as short term gain whereas it is long term investment plan on continue basis.Also I have previously told you it can be part of overall investment portfolio.

Let me explain :

Take a loan against FD which normal earning person can easily repay within 6-12 months. No need to take higher risk. This is small investment on regular basis which can be done in the name of Housewife or mother to save the tax on interest. I have made a data based presentation for 10 years with minimum return possibility. Here I am not able to paste excel presentation with proper rows & colum marked. It is getting scattered. Hopefully you can try to arrnage for yourself in readable content

Investment Loan Total FD FD Interest @ 8% Loan Intrest Net Return Total FD Value

50000 30000 80000 6400 3000 3400 86400

86400 30000 116400 9312 3000 6312 125712

125712 30000 155712 12457 3000 9457 168169

168169 30000 198168 15854 3000 12854 214022

214022 30000 244022 19522 3000 16522 263544

263544 30000 293544 23484 3000 20484 317028

317028 30000 347027 27762 3000 24762 374790

374790 30000 404790 32383 3000 29383 437173

437173 30000 467173 37374 3000 34374 504547

504547 30000 534547 42764 3000 39764 577311

Total Investment in 10 Yrs 380000 (50000+30000*10+30000 Loan Intrest)

Total return 577310

Net Surplus 197310

Moreover I have calculated interest on loan on simple intrest formula on yearly basis whereas it is actually on reducing balance basis.So total interest will come down & will be added in net surplus. Also if any one can manage to repay loan before 12 months in each cycle may yield more return.

Hopefully I have managed to convience you all that this scheme can manage to give return if followed carefully and gives safe & secured return. Pls do not compare it with return with equity market where we are always in mercy of market conditions & luck. I do agree that it is a bit complicated and need to visit 2-3 times bank in every year. But obvious gain is there. 🙂 🙂

Thanks you all for your valuable time & feedback

Regards

If you invest at 8% and Loan at 10% from it. You can profit only if the loan amount gets anything above 10%.

Example

100000 at 8% for 1 year you earn 108000

80000 at 8% for 1 year you earn 86400

Your return is 108000+86400=194400

Loan 80000 at 10% for 1 year you pay=88000

Your actual return is =194400-88000=106400

So if you look at the example you will be making a loss of 1600 which is 1.6%.

@Dharamesh: I dont see any profit either but I see lot of pain in tracking loans and FDs. Generally (all) banks try to squeeze any meager amount from their clients. Actually Banks make money from these 1% or 2% between their loan with RBI and loans given to their clients’. Like you do between FD and loan.

Karthik,

8 lakh loan at 10% per year would be – 8,80,000. So here he has a loss around -14,000.

If you now decuct this loss 14,000 from the original FD then the actualy return earned will be not 8% rather 6%. I dont see any profit in it.

I think, Dharamesh is trying to put this..

Assets

10 Lakh FD at 8% for one year – Maturity amount – 10,83,634

8 Lakh FD at 8% for one year – Maturity amount – 8,66,907

Liabilities

8 Lakh Loan at 10% for one year, Total Outgo – 8,43,992

The FD taken with the loan earns Rs. 22,915, which can be considered as a total return of 1,06,549 instead of 83,634.

But, If we consider 30.9% Tax, the difference is very small which comes to 2,240. For 20.6%, difference is 9,132 and for 10.3%, difference is 16,023.

Will you continue to earn money on the FD, over which you have taken a loan?

I am not convinced that you will get any positive return out of it. Also its too complicated to think of. If possible please show with calculation for one year how much money you are going to make.

Hi Ramesh

Yes this formula is already implemented by my father in law and he had developed sound investment out of it. Now he has grown old after fullfilling all his responsibilities with good financial backup.I have posted this just to have views of other members of this website for pro & cons of scheme. May be SIP in MF is better idea provided it give good return. I have portfolio of approx 2 lacs in MF in different scheme since last 5-6 years. Only few have responded well…rest seems junk to sell off. MF have risk factor to gain. No expert can predict any fund in advance that it will be a super hit.whenever any fund performs well expert starts to recommend it. Its just trial & error method of investment.

Would like suggestions for good MF for SIP

Moreover I am not saying above FD scheme is one & all should be in portfolio. This is one of the type of secured investment can be included in overall portfolio. May be some people can come out with better idea.

It seems that you are creating money out of thin air. Better check the details or do it yourself over a single year, and see how much money you made.

and, when you say your ‘net worth’ increases by 30k by getting a loan against FD, your ‘Liability’ increase by 30k.

Yes karthik liablity will also be incresed by 30K for that particular year but it is secured liability. Your suggestion of SIP in MF is good. Can you suggest few good MF suitable for SIP.

You are just complicating the way of investing, paying an unncecessary charge of 2%, and investing the 30k in Equity as a lumpsum which is not a good idea.

Instead, we should go for Systematic Investment plan and make the ‘habit’ of investing small amounts steadily (the amount you will be paying for the loan that you took against the FD can be used for investing in SIP)

Can you answer one simple question?

effectively what percentage return do you think you earn from your 50k investment?

Hi Karthik

Above given practice develops the habit of investment & gives instant result. For one year return on 50K will not be more than 6% after deduction of loan interest but total net worth of investement after maturity will be 86400 in a year.May be the same can also be done with 50K FD and opening an RD but RD gives somewhat return only opted for 5 years.

Now 36400 can be used for any long term investment in MF or stock market and remaining 50K can be used for FD against to repeate the cycle.