Passive investment is when you aim to increase the returns over a longer duration by keeping the frequency of trades to minimum levels. The basic idea is to avoid the fees on performance that usually occurs from frequent trading.
Passive investment leads to passive income, which is derived from various sources like dividends, rent of a property, limited partnership or any enterprise wherein a person is not actively involved. Like active income, passive income too, is taxable.
A FD or term deposit, is an investment where the interest rate does not change for the entire duration of investment. All you need to do is park a certain amount of money in the fixed deposit and forget about it for a stipulated period. That amount is bound to grow within that stipulated period due to the interest you receive on it.
Now there are two options: You either opt to deposit the interest to your account monthly or quarterly; or you can opt to withdraw the principal amount along with the interest at the time to maturity. Moreover, FD rate of interest is usually more than the interest of savings account, and hence, considered a better option.
Investors own a small part of public companies and consistently grow their dividend income over the years. This in turn helps to increase the passive income through dividends even if there is no addition of new funds. Hence, they are often considered as one of the easiest ways to earn passive income. Again, this money can be used for re-investing in shares or parking in fixed deposits. Dividend yields vary from one company to another and can even fluctuate at regular intervals.
If you are willing to invest in dividend stocks to create passive income, keep in mind these two basic points for better impact:
Mutual funds tied to a market index are known as index funds. As the funds are designed to reflect the performance of the underlying index they track, they offer more advantages over other investments to the passive investors. Moreover, index funds are managed passively, hence the securities included in them don’t change unless the structure of the index changes. This eventually results into lower management costs. Apart from that, the lower turnover rate makes index funds more tax-effective.
Mutual funds are a part of securities which are pledged to the bank to avail the facility of loan against securities. For instance, financial companies like Bajaj Finserv provide loan against securities with various other benefits, which can be used to meet unexpected expenses or financial requirements.
The fact about real estate is that the rates may fluctuate, however, the value of a property never depreciates, it only appreciates. Hence, real estate is considered one of the preferred choices for passive income to generate long-term returns. Buying a property and giving it out on rent ensures regular source of income in the form of rent.
The best part is that the rent as income is likely to be steady unless you decide to sell the property. At times, extra investment may be required to maintain the property. But, in the long run, it often pays off as a good source of passive income.
As compared to active investing, the charges associated with passive investing are much lesser. Moreover, since the trade and investment frequencies are lesser, the taxes applicable on your investments are also reduced with passive investing. Thus, passive investing is one of the most ideal options for investors who do not wish to conduct regular trading, yet look forward to availing the benefits of it.