How to soar higher with Positive Carry! May 18, 2022
As US Fed interest rates are predicted to rise 6 times this year, it’s best to start planning ahead and ensure you make the right investments decisions.
Positive carry refers to the concept of investing borrowed funds and making a profit from the difference between monetary gains and the loan interest paid.
These are some methods you can use to achieve this.
Cash flow financing
Through the pledging of a securities or insurance policy, you will be able to take up a loan you can use to invest with, allocating the borrowed sum into one or more assets to generate a profit.
These assets may be in the form of stocks, unit trusts (UT), bonds, real estate investment trusts (REITs) or other quoted investments. Assets such as Stocks, UT and REITs distribute dividends periodically. This is where we are able to derive profit though arbitrage or investment planning.
For example, if you were to borrow a sum at a loan interest rate of 3% per annum for a period of 1 year and invest the full amount into certain stocks paying a dividend of 6% per annum, you will be able to make a profit of 3% of the loan amount.
Additionally, an investor is also able to hold the assets until prices goes up and sell them in order to make a certain profit. These assets could either be for the short or long term depending on the investor’s risk appetite. Investors who prefer riskier alternatives can even use the amount to leverage certain securities to maximise their gains. They may have to implement different strategies to achieve this goal.
Premium Financing
Another method available is to take up a loan to purchase a single premium policy. The policy will have a monthly pay out after a certain period of time with interest gained on the accumulated cash within the policy.
Positive carry can be achieved if the monetary gains in the future far outweigh the initial investment and monthly interest payment for the loan.
Most of these premium policies have to be held for the long term in order to generate more monetary gain, as deficit happens in the initial few years. The longer you hold the policy, the compounded interest gains will be exponentially higher as the overall cash value of the policy continually increases.
Moreover, certain premium policies can be transferred to the next generation, which will raise the monetary horizon further upwards.
Start investing now!
In conclusion, as interest rates are on the rise, it’s best that you start investing early! By comparing the cost of borrowing versus the expected investment returns, positive carry can be achieved.
As the returns and risks are correlated, always plan and proceed with caution.
Do reach out to us if you have any enquiries or if you are looking for any financing solutions, email us at askbuddy@phillip.com.sg.
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About the author
Kenny Teo & Elston Soares
Kenny Teo is a Loan Specialist with Phillip Credit Pte Ltd.
Elston Soares is an editor with the Phillip Securities Research team.
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