You have probably heard about “passive income” before. It’s money you make without actively working for it. People earn passive income in many ways, like making apps, selling online courses, or doing affiliate marketing.
But can mutual funds help you earn passive income too? Yes, they can. Let’s understand what passive income is and how mutual funds can help you earn it.
WHAT IS PASSIVE INCOME?
Passive income is money you earn without working directly for it like in a regular job. It’s income that keeps coming in even if you’re not actively putting in a lot of effort. You might work hard for a short time to set it up, but then it keeps bringing in money for a long time without needing much ongoing effort from you.
Let’s say you make a mobile app and sell it on Apple or Android stores. If lots of people use your app, you can keep making money from it for a long time without doing much more work. It’s like owning property that you rent out to people, or investing in stocks that pay you dividends, or putting money in a fixed deposit account that earns you interest over time. All these things can bring you income without you having to keep working for it constantly.
EARNING PASSIVE INCOME FROM MUTUAL FUNDS
Apart from the options discussed above, you can also consider investing in mutual funds to earn a passive income. There are a few different mutual fund categories that can be considered an excellent source of regular passive income.
Dividend Mutual Funds
Dividend Mutual Funds are like big pots of money where many people put their savings. These funds mainly invest in companies known for regularly sharing their profits with investors, which are called dividends. Instead of trying to pick these companies by yourself, you can invest in these funds and own a small piece of many dividend-paying companies all at once. The money you get from dividends is usually given out every six months or once a year. But remember, the exact amount and how often you get it can change over time.
Hybrid Mutual Funds
Hybrid Mutual Funds are funds which invest partly in equity and partly in debt and other asset classes. The debt component provides stability to the fund and equity component allows the fund to grow and beat inflation. There is a popular option called SWP (Systematic Withdrawal Plan) which you can avail in Hybrid Mutual Funds. This SWP option allows you to withdraw a fixed amount every month/ quarter as regular income to meet your lifestyle expenses. Investors usually take out 6%-8% of corpus as regular income annually. This allows the investors to generate a regular income while also allowing the corpus to grow at a moderate rate. SWPs are commonly used by retirees or individuals seeking regular income from their investments.
If you want to make passive income from your mutual fund investments, there are some types of funds you can think about. But remember, each type of fund works differently and has its own level of risk and potential returns.
If you are new to investing, it’s a good idea to start with a small amount and learn how these funds work. Once you’re more comfortable, you can think about investing more money.
My Money Panda offers a Balanced Basket of all Hybrid Funds for the purpose of generating a regular income using the SWP option. You can systematically construct your SWP Plan using the Balanced Basket, ensuring that your withdrawals always align with your long-term financial goals. Creating a financial plan is like having a roadmap for your financial future. Consult with our investment expert to create the right portfolio suited to your investment goals and risk profile.
FAQs
1. Are Mutual funds a good stream of passive income?
Yes, mutual funds can be a good source of passive income because they offer opportunities to earn dividends, interest, or capital gains without requiring active involvement in managing investments. However, the suitability of specific mutual funds for passive income depends on factors such as their investment objectives, risk profile, and performance.
2. Are all mutual funds suitable for generating passive income?
Not all mutual funds are suitable for generating passive income. Some mutual funds focus on growth or capital appreciation rather than providing regular income through dividends or interest. It’s essential to choose mutual funds specifically designed for generating passive income, such as dividend funds, income-oriented bond funds or hybrid funds.
3. Can I rely on mutual funds for a consistent source of passive income?
While mutual funds can provide a source of passive income, the income generated may not always be consistent due to factors such as market fluctuations and changes in dividend or interest rates. Diversifying investments across various types of income-generating mutual funds can help mitigate risks and enhance the likelihood of consistent passive income over time.
4. Is it possible to reinvest passive income generated from mutual funds?
Yes, it is possible to reinvest passive income generated from mutual funds through options like dividend reinvestment plans (DRIPs) or automatic reinvestment programs offered by mutual fund companies. Reinvesting passive income can help compound returns over time and potentially increase the value of your investment.
5. What is SWP?
SWP stands for Systematic Withdrawal Plan. It is a facility offered by mutual funds where investors can withdraw a fixed or variable amount of money from their investment at regular intervals. This allows investors to receive a steady stream of income from their mutual fund investments while still keeping their principal invested. SWPs are commonly used by retirees or individuals seeking regular income from their investments.
6. What are the benefits of SWP?
Regular Income: SWP allows investors to receive a predetermined amount of money at regular intervals, providing a steady income stream.
Flexibility: Investors can choose the frequency and amount of withdrawals according to their financial needs, whether monthly, quarterly, semi-annually, or annually.
Capital Preservation: SWP enables investors to withdraw only a portion of their investment, helping to maintain the principal amount invested while still generating income.
Tax Efficiency: Depending on the type of mutual fund and holding period, withdrawals through SWP may attract lower tax rates compared to interest income from fixed deposits or other sources.
Convenience: SWP automates the withdrawal process, eliminating the need for investors to manually sell fund units to generate income, thus making it a hassle-free way to receive regular payouts from investments.
7. Who can use SWP?
Individuals Seeking Regular Passive Income: Investors who desire a consistent stream of income from their investments, regardless of their age or retirement status, can opt for SWP to receive periodic payments.
Investors with Financial Goals: Those saving towards specific financial goals, such as funding education expenses or purchasing a home, may use SWP to systematically withdraw funds to meet their objectives.
Retirees: Individuals who have retired and are looking to supplement their income from their investments can use SWP to receive regular payouts.
Tax Planning: SWP can also be employed as part of a tax-efficient strategy to manage tax liabilities on investment income, especially for individuals in higher tax brackets.
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