'No margin call" mutual fund loans: these loans are available for investments in third-party mutual funds

Money Digest, June, 2002 by Chuck Dr. Chakrapani

Borrowing to invest, or leveraging, is a good way to make money. But leveraging is a double-edged sword. If one is over-leveraged, one could lose all one's capital and end up owing money.

The main problem: when the value of your investment goes down, you have to find additional money at short notice. For instance, if you buy a stock at $10, your broker will lend you another $10 with the stock as the collateral. If the stock goes down to to $4, you will end up owing your broker $6. Even if you sell your investment, it will fetch you only $4 and you still have to find more money to pay your broker.

Leveraging magnifies both profits and losses and is not recommended as a strategy for novice investors.

During the past year, mutual fund companies have introduced "no-margin call" loans. In many cases, these loans apply only to the funds offered by the lending company. However, some companies offer "no-margin call" loans for third-party funds.

As an example, B2B Trust, which is owned by Laurentian Bank offers the following options:

2 for 1 Investment Loan: For every dollar provided, B2B Trust will lend up to two dollars for purchase of eligible mutual funds.

You can select interest-only payments with the Margin Call Option or monthly payments of principal and interest with the No Margin Call Option.

100% Investment Loan: This is a regular unsecured loan available with the Margin Call Option and with the No Margin Call Option. Each option offers monthly blended payments of principal and interest. And you can amortize the loan for up to 20 years.

(The above information is as posted on the B2B Web site. Please obtain additional information before investing.)

AIC, AGF, Clarington, Dynamic, Empire Life, Manulife, MRS Trust, Sun Life Financial, TD Canada Trust and other that offer "no margin call" loans. Even with safeguards such as "no margin call" loans, leveraging is not for everyone. Before executing a leveraging strategy you should have the ability and the willingness to take some risks in search of higher returns. If you do, these loans offer an attractive means of enhancing your investment returns.

Chuck Chakrapani is Editor of Money Digest and Chairman of the Investors Association of Canada.