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Loan Portfolios and Expected Loss
Loan portfolio is nothing but the process in which the investor in order to overcome the already existing loss gets loans and invest those money in the capital market. It happens mostly in case of retail investors and rarely with institutional investors. In this case the investment risk is doubled. The first risk being the market risk, the second one is that the fund being invested in the market is a loan and hence it has to be repaid with interest. There are whole lots of losses that are expected in this type of investments. Some of those losses are,
- Time constrain is a primary factor in this mode of investment. The investor need to return back the interest to the loan within a frame of time. The time constrain plays a huge factor in getting back the return. The investor might have made a calculation that the investment would yield in a time period but in reality the asset might take some time to come out with a expected return. The investor in this case has to sell the asset in between in order to settle the loan.
- Increase in stress on the investor is another important problem related to this type of investment. The investor has to face double the stress than what is present in the normal form of investment which is made out of the own personal money of the investor. It is often known that investor tend to make more mistakes if the stress level of the investor is more.
- More profit expected from this type of investment by the investor. The investor must meet his/her earlier loss as well as must repay the loan. It is therefore necessary for the investor to make more profit than the normal way of investment.
- The investor tends to take higher risk because the returns expected from this type of investment are more and hence the risk to be taken must be appropriate to that level.
- Ignore the basic of investment happens mostly in the case of this type of investment. The investors tend to forget the basic of investment in these type of investments. This might lead to huge loss at times.
- What is Loan portfolio?
- What are some of the expected loss due to this type of investment?
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