Advantages of leveraging…

Leveraging (like derivatives) is neither good nor bad. Huge wealth has been created by leveraging (Reliance, Tata, Uday Kotak (net worth Rs. 30 lakhs to market cap Rs. 26,000 crores in 25 years) – and also ALL bankruptcies have been caused by bad management of debt.

There are many advantages of gearing or borrowing:

a.    It increases the size of the investment itself. If the doctor has Rs. 10,00,000 to invest and he is willing to leverage 100%, he will be able to borrow another Rs. 10,00,000. This means he can buy that asset for an amount of Rs. 20,00,000.

b.    The yield is likely to be in the form of some income (like rent) and some capital gain. From a taxation point of view it is always nice to have an interest expense, but leading to capital gains. This is because capital gains get taxed at t lower rate – if at all. For example dividends and capital gains are tax free as far as equities are concerned. Even in case of real estate the rent is likely to be less and the capital gains much higher. Thus post tax the returns are likely to be far superior.

c.    Capital Gains is a superior way of creating wealth because the unrealized portion compounds at a superior rate than realized gains – thanks to the amount growing larger without interruption for paying taxes or other withdrawals.

d.    Leverage, depreciation benefit, taxation etc., are nice plays in the hands of a Chartered Accountant!

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One Response to “Advantages of leveraging…”

  1. a double edged sword comes to can cut or get really needs a good pyschological temperamant to handle debt.

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