An income from assets which do not require your active involvement falls under the category of passive income. Here your money works for you. Passive income has always been an attractive notion and the economic downturn following the Covid-19 outbreak has only highlighted its importance.
In technical terms, passive income can be defined as net rental income or income from your business interests where the taxpayers are not materially involved. In essence, an income which does not include salaries, portfolio, or investment income can be classified as passive income.
Let us explore ways to generate a passive income.
Income from real state may fall under semi-passive income as investment in real estate is very much an active venture. But once you own a property — usually at 20% down payment — and decide to rent it out, it is mostly about maintaining the property.
You can also opt for a professional property manager, who usually changes 10 percent of the monthly income. Spotting the right investment, however, is the key because not all properties may give a healthy return.
Another benefit of investing in real estate is the loan pay down. If you have obtained a loan to buy the property, your tenants are paying part of the loan and once your loan is paid off the income from your property increases multi-fold.
Real estate investment trusts (REITs)
A more passive method of investment in real estate is investing in REITs. A real estate investment trust can be understood as a mutual fund holding several real estate projects. The fund is managed by professionals and it does not require your active involvement.
This is often recommended since they pay higher dividends than other instruments such as stocks or bonds. Besides, it is more liquid than owning a property as you can sell your interest in real estate whenever you want. It is also considered a natural hedge against inflation as returns have been seen to consistently outpace Consumer Price Inflation.
REITs, however, are relatively new in India. Market regulator SEBI introduced REITs in 2007, but regulation was only approved in 2014. There are mainly two types of REITs – equity and mortgage.
A passive way to invest in the stock market is putting your money in an index fund. For instance, if you invest in an index fund based on Nifty50, you will be invested in the general market without being actively involved in the everyday move. Besides, you can invest in an index fund on a sectoral basis. For instance there are options such as gold, banking, and international markets.
The concrete proof of why investors over the years have leaned towards index funds is the multi-fold jump in the value of Sensex and Nifty in the past couple of decades. Despite the markets losing momentum during huge setbacks such the 2008 financial crisis of the massive slide in March-April this year owing to the Covid-19 outbreak, the trust in the security market has only grown and so has the index value.
Dividend yield stocks
Stocks that have a healthy dividend paying history are called dividend yield stocks. Such companies have a proven track record and a steady cash flow. Investing in dividend stocks, therefore can fetch you income on a regular basis, irrespective of the market cycle.
Spotting a good dividend yield stock could be a challenge. The dividend yield can vary from company to company and could vary from one year to another. Long term investors and market experts usually suggest companies that have a 25 year consistent record of paying dividend to its investors.
You may also require expert advice from someone who would also know about the liquidity position of the company, debt status and other key factors.
Additional Read: How to Start Investing in different Asset classes based on their risk?
The pandemic may well be a wakeup call to better manage your finances. Along with building a well-diversified portfolio, having a passive income source could prove to be useful in the future as it can greatly simplify an investor’s life.
With Tata Capital’s Wealth Management solutions, you receive the best portfolio guidance for the ongoing economic uncertainty. For those looking for expert advice to organize their finances during the ongoing pandemic, Tata Capital’s Wealth Management solutions can help with SIP mutual fund investments and other wealth creation products so as to maximize your earnings.