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Investment Funds Multiplier case study

26 May 2016 |Case study
Learn how unlocking the value of your investment portfolio using a margin loan can help build wealth and achieve your financial goals on a chart background.

Investment Funds Multiplier case study

26 May 2016 |Case study

Sandy contributed $40,000 into a standard Margin Loan and borrowed $40,000 to invest $80,000 into Fund A, which has a maximum lending ratio of 75% assigned to it.

Now let’s assume that due to market volatility, Fund A falls in value by 42%, resulting in Sandy’s portfolio being valued at $46,400. Sandy is now in Margin Call and is required to inject $5,200 into the Margin Loan in cash or by selling enough of her portfolio to equate to $5,200 of cash.

Unfortunately Sandy does not have $5,200 in a bank account so she has no option but to sell her investment in Fund A at a low price.

What would the difference be with Investment Funds Multiplier?
If Sandy had decided to invest in Fund A using the Investment Funds Multiplier, instead of having to pay the $5,200 Margin Call in one lump sum, Sandy would commence a Periodic Repayment Plan of 1% per month until the Lending Value ratio was restored to 75%.

Comparison of Margin Call vs Periodic Repayment Plan

Margin Call Comparison Chart graph

In this example and as shown on the chart, Sandy would pay $400 per month under the Periodic Repayment Plan instead of a single Margin Call payment of $5,200. The chart also shows that if we assume that the market recovers in four months time and Sandy’s gearing ratio is restored back to 75%, she would have paid a total of 4 x $400 or $1,600 over the period as opposed to a single $5,200 Margin Call lump sum, although the Margin Call payment could be re-drawn if the market recovers. Sandy would also have known that by borrowing $40,000, the Periodic Repayment Plan would be set at a fixed $400 per month.

Sandy would only need to pay a lump sum if the gearing ratio were to reach 95%. If this happens, she would have to pay down the loan to a 85% gearing ratio so that the Periodic Repayment Plan can continue.

This information is correct as at 26 May 2016.

Gearing involves risk. It can magnify your returns; however, it may also magnify your losses. Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). Information is general advice only and does not take into account your personal objectives, financial situation or needs. The views of the author may not represent the views of the broader Bendigo and Adelaide Bank Group of companies (“the Group”). This information must not be relied upon as a substitute for financial planning, legal, tax or other professional advice. You should consider whether or not the product is appropriate for you, read the relevant PDS and product guide available at www.leveraged.com.au, and consider seeking professional investment advice. Not suitable for a self-managed superannuation fund.

Examples are for illustration only and are not intended as recommendations and may not reflect actual outcomes. Past performance is not an indication of future performance. The information provided in this document has not been verified and may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.

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