Borrowing to invest: what the arithmetic shows
On this page
The forms it takes
| Form | How it works | Typical cost (roughly) |
|---|---|---|
| Personal loan or credit card | Cash borrowed and then invested | 11% to 24% a year; 36%+ on a card balance |
| Top-up home loan | Extra borrowing against a house | Near home-loan rates, over many years |
| Margin trading facility (MTF) | The broker funds part of a share purchase; the shares are pledged | Often about 12% to 18% a year, charged daily |
| Loan against shares or mutual funds | Existing holdings pledged to borrow | Often about 9% to 12% a year |
| Futures and options | A small margin controls a large position | No interest, but losses can exceed the margin |
Rates vary by lender; check the actual rate and charges in the agreement.
A loan magnifies both ways
| Prices over the year | Holding at year end | Repay loan + interest | Your money left | Change in your money |
|---|---|---|---|---|
| +20% | ₹12,00,000 | ₹5,60,000 | ₹6,40,000 | +28% |
| +10% | ₹11,00,000 | ₹5,60,000 | ₹5,40,000 | +8% |
| −10% | ₹9,00,000 | ₹5,60,000 | ₹3,40,000 | −32% |
| −20% | ₹8,00,000 | ₹5,60,000 | ₹2,40,000 | −52% |
Without the loan, the same four years would have been +20%, +10%, −10% and −20%. The loan raised the good year from +20% to +28%, and deepened the bad year from −20% to −52%. Gains get a boost; losses get more than double.
The loan does not fall when prices fall. It stays the same size and keeps adding interest, so the whole fall lands on your own part.
The same year, with and without
Change the amounts, the rate and the move. The chart shows every move from −40% to +40% at once.
The steeper line is the borrowed case: it gains more when prices rise and loses faster when they fall, and it sits below the other line until the move covers the interest.
The interest hurdle
With a 12% loan, the borrowed part loses money in any year the investments grow less than 12%, including flat years and ordinary positive years. The interest is certain; the growth is not. Over long periods, broad Indian share indices have had many individual years below 12%, including several negative ones.
Deeper holes take longer to climb
| Fall in your own money | Rise needed to get back |
|---|---|
| −10% | +11% |
| −25% | +33% |
| −50% | +100% |
| −75% | +300% |
In the example above, a 20% market fall became a 52% loss on own money, which needs a 108% gain to recover, while the loan is still charging interest. See the recovery lab.
Margin calls and forced selling
A lender against shares or a broker's margin facility requires your own share of the holding to stay above a set level. When prices fall far enough, a margin call asks you to add cash or pledge more securities, usually within a short time. If that does not happen, the shares can be sold to repay the loan.
Your share starts at 50%. It falls to 40% when the holding is worth ₹8,33,000, a fall of about 17%. A fall like that has happened within weeks at times. The calculator above shows this point for any amounts.
Forced selling turns a fall on paper into a realised loss, and the shares are gone before any recovery. Someone holding without a loan can choose to wait; someone with a margin call may not get that choice.
When the bills arrive together
In 2008 and in 2020, share prices fell sharply in the same months as layoffs and pay cuts. An EMI does not pause for either. A loan taken to invest adds a fixed payment to the household budget at the point when the investment is worth less and income may be lower, which is the combination that tends to force sales.
How tax treats the interest
When the shares are sold, tax is worked out on sale price minus purchase price; interest paid along the way is not added to the purchase price for listed shares. Against dividend income, a deduction for interest is allowed only up to 20% of the dividend. Gains are taxed in the usual way: 12.5% on long-term equity gains above ₹1.25 lakh a year and 20% on short-term gains, as of November 2026.
So a 12% loan costs 12% after tax, while a gain on the investment is taxed. The hurdle in the earlier section is higher once tax on the gain is counted. Check the current rules with a tax professional.
What to check next
- What is the interest rate, including processing fees, and is it charged daily or monthly?
- What fall would wipe out your own money, and what fall triggers a margin call? Try the calculator.
- Could the EMI still be paid if income stopped for six months while the investment was down?
- Is any part of the borrowing a credit card balance, which costs far more than any other loan?
- See what each kind of loan costs and the charges on each trade.
This page shows arithmetic, not advice about any decision. For your circumstances, consult a SEBI-registered investment adviser.
Educational explanations only, not investment advice, research or a recommendation to buy, sell or hold any security. Past performance does not indicate future results. Every example uses made-up round numbers. Read the Disclaimer before relying on any figure.