By: PR Fueled

Geared investing, or leveraging, is an investment strategy where borrowed money is used to increase exposure to a portfolio of assets. By borrowing funds, investors can control a larger position with less of their own capital. While this strategy may increase the potential for higher returns, it also amplifies the risk of greater losses. It’s important to carefully consider your financial goals, risk tolerance, and ability to manage debt before pursuing geared investing.

It’s important to remember that not everyone is suited to this strategy. Before jumping in, you need to determine if geared investing is right for you, your financial goals, and your risk tolerance.

Understanding Geared Investing

Geared investing means borrowing money to increase your exposure to an asset class – usually equities. This allows you to invest more than your own capital would allow, resulting in a greater potential to earn. For example, let’s say you invest $100,000 in a geared share fund with 50% to 60% gearing. In this case, the fund will borrow an additional $50,000 to $60,000, so you’ll have a total investment exposure of $150,000 to $160,000.

As your exposure to the market is greater than your initial investment, you can get returns based on a bigger pool of assets. If the underlying stocks go up 10%, your returns will be higher compared to if you had invested the $100,000 without borrowing. However, if the stocks go down, the losses are amplified as you still have to repay the borrowed money regardless of how the investment performs. Therefore, the risk is high.

Who Are the Right Candidates for Geared Funds?

Geared funds can grow big, but they’re not for everyone. Let’s see who the right people are and why geared investing might benefit them. 

Experienced Investors with a High-Risk Tolerance

Geared investing is not for the faint-hearted. It requires strong risk management skills, as the chance of losing money is just as high as the chance of making money. Investors who know the market well and are willing to take big risks are likelier to be interested in geared investing.

Investors Looking for Long-Term Growth

Geared funds are better suited for long-term investment. If you’re investing for five to 10 years or more, geared investing may perform better. For example, the Geared Australian Share Fund is invested in quality ASK 100 companies for growth. This fund is recommended for long-term investors who need big capital growth over time. In this case, reinvestment of earnings and some degree of gearing is expected to produce good returns. 

High-Income Investors Seeking Tax Efficiency

For a high-income earner, geared funds can provide tax benefits through magnified franking credits. This makes geared investing an attractive option for people looking to reduce their taxable income while gaining exposure to growth stocks.

Investors Looking for Diversification and Hands Off Management

Geared funds offer hands-off management and diversification. If you’re an investor looking for a more relaxed approach, a geared fund managed by an experienced team can be a good option. These funds typically have a diversified portfolio of quality companies, so you don’t have to worry about individual stock picking.

Endnote

Geared investing may offer the potential for higher returns, but it also involves significant risk. It is typically more suitable for experienced investors with a high-risk tolerance and long-term investment horizon. If you’re thinking of geared investing, take the time to work out your personal financial goals, risk tolerance, and whether this strategy fits with your long-term plans.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Geared investing involves significant risks, including the potential for financial loss. Carefully consider your financial goals, risk tolerance, and investment knowledge before proceeding. Consult a licensed financial advisor to determine if geared investing suits your situation. Past performance is not indicative of future results.

Published by Charlie N.