The carry trade is dead. Long live the carry trade.

Easy because, in essence, it involves borrowing money where it’s cheap and deploying it where returns are higher.

But it’s difficult because of the delicate balance required for success. Interest rates, exchange rates, and investment opportunities must align perfectly for the carry trade to be profitable. In fact, it might be easier to fund a unicorn startup than to execute a profitable carry trade.

Yet, there has been one rare and highly profitable carry trade that has persisted for years—centred on Japan, the originator of cheap funds. Japan’s low-interest environment allowed funds to flow to other countries, hoping to capture the spread.

For die-hard value investors who might wonder what all the fuss is about, consider this: Warren Buffett himself tapped into Japan’s super cheap funds, reportedly borrowing billions at just 0.5% per annum to invest in Japanese stocks. So, kind of a carry trade, but of a simpler kind, perhaps. But then simplicity has always been Buffett's hallmark, hasn’t it?

Read this | Dear value investor, welcome to perplexing times

The carry trade is indeed legitimate—endorsed by none other than the Sage of Omaha himself.

However, this remarkable era of cheap money seems to be nearing its end as Japan raises interest rates and its currency strengthens, both of which erode the profitability of the carry trade. The impact has been clear, with money flowing back and stock markets selling off sharply.

More here | Yen yorker: What is the 'yen carry trade’ that’s causing a global stock rout?

For now, that particular carry trade seems to be over. If you’re interested in more details, I recommend checking out Vivek Kaul’s X thread.

While the easy-money yen carry trade has turned into a nightmare for many, other versions of the carry trade are still in play—and you might be at the centre of them.

Some of these, in fact, are even more dangerous than the yen carry trade.

Let’s take a look at some of these risky strategies.

Carry trade candidate #1: Not repaying loan to invest in stocks

One irrational theory that gains popularity in every bull market is this: instead of repaying your loan, invest that money in stocks.

Essentially, you're leveraging your property to generate funds at a specific cost—namely, your home loan’s interest rate. You then deploy that money in the stock market, expecting returns to exceed the cost of your debt.

In hindsight, this might seem like a clever strategy. But the fact is that no one knows where the stock markets are headed. And there’s every possibility that the markets could collapse 20% or more in a short period of time. Incidentally, the Nikkei 225, the Japanese benchmark index, did fall 20% in a matter of days as the carry trade unwound.

In the event of a market sell-off, this "shrewd" strategy works like a double-edged sword. Not only do you need to pay the interest on your loan, but you will also need to deal with potential loss of capital. Ouch!

Such a scenario is hard to imagine during a bull market. But if you’re rational—and you likely are since you're reading this "contrarian" column—look at how this strategy has played out in past bull markets. People didn’t just lose their homes; they often lost their businesses too.

So, if anyone tries to appeal to your emotions by pitching this carry trade idea, say "no thanks," loud and clear.

Carry trade candidate #2: Taking out a fresh loan to punt on stocks

What’s even riskier than not repaying a loan and investing that money in the stock market? Taking out a new loan specifically to punt on stocks. To make matters worse, these loans—whether for margin trading, IPO funding, or broker financing—tend to be far more expensive than a standard home loan.

At its core, leveraging through F&O, broker funding, or any similar method is just another form of the carry trade. You're making numerous assumptions, hoping everything aligns perfectly in a short window. The reality? Over 90% of those who try this lose money—and yet they keep coming back for more.

If you ever get the urge to borrow money for stock market bets, think again. If you're still tempted, talk to someone who went broke doing it. That dose of reality might be exactly what you need.

Carry trade candidate #3: Moving money from FDs to stocks

My favourite carry trade idea is the one most investors are probably guilty of: shifting fixed-return money from bank deposits into the stock market, hoping to make a spread. And yes, that includes SIPs into equity funds, which are still stock market investments and carry inherent risks. It’s surprising how many people overlook this.

This move takes the risk to an entirely new level.

Money in a bank is typically a safety net, meant to cover near-term needs or provide long-term security, especially if you’re retired or have important financial commitments. By trading that security for a punt in the stock market, you’re setting yourself up for a roller-coaster ride that often ends in disaster.

Now, you might blame a finfluencer for luring you into making the switch, or perhaps your own greed, but the fact remains that this could be one of the worst investment decisions you'll ever make.

So, these are the carry trades that revolve around you.

Since we're in the middle of a bull market, you might dismiss the idea of unwinding these trades—they're likely working well for you right now. For the moment, at least.

Also read | Invest 100% in stocks? Be aware of the bull market’s investing myths

However, it’s important to remember that carry trades only work as long as the conditions hold. When they unravel, they often leave disaster in their wake—and that’s a financial pain you definitely want to avoid.

Rahul Goel is a finance and publishing professional with over 25 years of experience in the industry. You can tweet him @rahulgoel477.

Always consult your personal investment adviser or wealth manager before making any financial decisions.