The economic turmoil and job insecurity due to the Covid-19 pandemic have forced Indians to look for passive income or a secondary source of cash flows.
A steady source of second income is a good way to tide over the short-term financial difficulties caused by unforeseen events like a job loss or a sabbatical from work to pursue studies or reskilling programmes. An extra source of income would also be a great help in times of high inflation and the rising cost of living. Not surprisingly, every serious investor and saver in India is now in the search of a source of passive income.
What is Passive Income?
Passive income refers to a source of recurring cash flow or income that doesn’t require too much time and effort from the person. Unlike a regular job or a business, it should not require active participation and dedicated hours every day to generate cash flow. An initial investment with an occasional top-up or a tweak in the portfolio should be more than enough. In other words, passive incomes require little maintenance.
Passive income can be used to supplement your main source of income, be it a job or a business. It can also be used to build an emergency fund or a long-term pool for funding children's higher education or even a retirement fund.
Additionally, passive income can be deployed to invest in other assets such as equity, mutual fund and real estate to build long-term wealth or generate more cash flows. Even a small passive income will eventually grow into a sizable source of cash flow through constant reinvestment and thus help you retire rich.
As a thumb rule, investment for passive income should be done in a manner that remains uncorrelated with the ups and downs in your main job or business. The basic idea is to use passive income to hedge the income that you earn from your primary job.
Here are five ways to generate hassle-free passive income in India:
1. Invest in a rental property: A monthly rent from a property, whether residential or commercial, is a good way to generate a sizable amount of passive income. Rental income can be substantial if you own a property at a prime location with good facilities and connectivity.
Rents tend to grow with the general rise in prices and the cost of living which is great for the property owner’s income.
If you own a residential property, then you can increase the rental income by furnishing the property and providing additional comforts such as air conditioning to the prospective tenant. Regular maintenance and timely repair and renovation of the property are a must to generate good rental income and ensure maximum occupancy.
If you already own a second property, then you can put it up for rent right away. If not, then you can invest in a ready-to-move-in property and let it out to prospective tenants. If you are planning to buy a second home, then do thorough research about the rental trend in the locality and match it with the additional interest burden that the new property will cause minus the potential tax savings.
2. Invest in high-yield non-cumulative fixed deposits. Most banks, non-banking finance companies and post offices offer long-term fixed deposits where interest on the deposit is paid at regular intervals to the investor. Investors have the option to earn or get the interest on a monthly, quarterly, half-yearly or annual basis. As a thumb rule, the lower the frequency of interest payout, the higher the yield on the initial investment.
In other words, the yield will be the highest for the yearly payout and the least for the monthly payout.
Non-cumulative FDs are best for retired or senior citizens who want a regular source of income rather than wealth maximisation.
However, this is not recommended for younger professionals. In contrast, in a regular or a cumulative fixed deposit, the interest is reinvested and the bank pays the maturity amount (principal plus interest) at the end of the FD tenure. The overall interest or yield on a non-cumulative FD is lower than a regular deposit with similar tenure.
3. Invest in a post office monthly income scheme (MIS): Investment in a post-office MIS account is a great way to generate additional income every month.
Investment in an MIS account can be made in multiples of Rs 1,000 with a maximum investment of Rs 9 lakh in a single and Rs 18 lakh in a joint account.
Prior to this year’s Union Budget, the limit was Rs 4.5 lakh and Rs 9 lakh respectively. Interest on the MIS account is 7.1 percent per annum paid monthly. At this rate, an investment of Rs 1 lakh will give you a monthly income of around Rs 590 or Rs 10,650 per month if you invest Rs 18 lakh in a joint account with your partner or any other family member. Remember investment in post office MIS has a lock-in period of five years.
4. Invest in high dividend-yielding stocks: Dividend income from stocks is a great way to earn passive income and most often it's tax-free for retail investors, unlike interest income from fixed income such as FDs and post office MIS. Dividend payout by companies rises in line with their revenues and profits either due to secular growth in their business or due to inflation.
This kind of buoyancy is missing in fixed-income products such as bank FDs and post office savings instruments where the interest rate or the yield is fixed during the tenure of the investment. Right now there are many stocks with dividend yields of 5 per cent or higher. Alternatively, you can invest in a stock with a low dividend yield (less than 2 percent) but with the potential to grow its earnings at the rate of 15-20 percent per annum.
5. Invest in an equity Mutual Fund with a dividend option. Indians generally invest in mutual funds for capital gains but dividend income from mutual fund schemes can be a source of good passive income.
For this, select the dividend option while investing in a mutual fund scheme.
In a dividend plan, the profits made are distributed among investors as dividends and they are not re-invested in the scheme. You get the dividends on a quarterly, half-yearly or annual basis. It should be noted that the dividend declared by the scheme leads to a corresponding reduction in the fund’s net asset value (NAV). This will adversely affect the capital gains that you will make from the scheme. Besides, the scheme declares a dividend only when the fund makes a profit and thus it is not guaranteed.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).