To earn passive income, individuals consider side gigs or work-from-home jobs. Earning Passive income may seem an enticing idea but it can take some time to grow your money and earn returns from it. However, if you are willing to put a little bit of extra effort to see your investments grow, earning Passive Income becomes a simpler affair.
Times are changing and people want to take more control of their finances. Thus, people pursue freelancing and indulge in side hustles so that they can earn more apart from their active income and direct these earnings towards investments. Many individuals seek Passive Income to increase their cash flows and put their money to work for them.
Some investments that generate Passive Income include renting real estate, dividend stocks or funds, earning interest by lending money, selling NFTs, starting a YouTube channel and limited partnerships among many others.
In this blog, we are going to discuss how financial markets are one of the most lucrative modes to earn Passive Income.
How to make Passive Income through Financial Markets?
1. Invest in Dividend Stocks
One way to build a Passive Income stream is to invest in Dividend Stocks. A dividend means that the company in which you invest, distributes a part of its earnings to investors regularly, like quarterly, half-yearly or yearly.
The best dividend-paying companies increase their payout with time and this helps investors in growing future income.
Also, Dividend Stocks are generally less volatile than growth stocks and also help individuals in diversifying their portfolios. Moreover, if investors choose to reinvest the earned dividend, they can earn more returns.
In other words, 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 and this helps in fetching income regularly, irrespective of the market cycle.
Thus, it is fair to say that Dividend Stocks are a great means of earning Passive Income.
(a) Dividend Index Funds and Exchange-Traded Funds
Selecting individual stocks to buy requires a lot of time, effort, and research. So, one can also invest in Index Funds or Exchange-Traded Funds that hold dividend stocks instead of choosing individual stocks to buy. Individuals who wish to indulge in a “hands-off” approach can use this form of passive investing.
Index Funds help in balancing portfolio risk, as market swings tend to be less volatile across an index as compared to individual stocks. Index Funds hold a selection of various stocks that try to perform like a given index, such as the S&P 500.
Dividend ETFs offer the diversification benefits of index funds while you do not have to get involved in the checking of stock performance regularly.
To invest in dividend stocks, index funds, ETFs or other publicly traded assets, one needs to open a Demat & Trading account, if they do not have one.
2. Bonds and Bond Index Funds
Bonds are a great way for investors to lend money to companies and earn interest income instead of buying an ownership stake in the company. Bonds are considered comparatively safer instruments than stocks but also generate a lower return on your investment.
However, bonds can be used for investing in a portion of your portfolio because of their lower volatility and relative safety as compared to stocks and are also another good source of earning Passive Income.
3. Dividend through Mutual Funds
Mutual Funds are another source of earning Passive Income through their dividends and have gained much popularity in recent times. They have evolved to grow over time and help individuals build money for their future financial goals.
Mutual Funds have an option of earning dividends which acts as a good source of Passive Income. However, one must note that the dividend declared gets reduced from the fund’s NAV. Also, the dividend that one earns is added to their income and taxed as per the applicable tax rates.
4. Invest in Closed-End Funds
Closed-End Funds (CEF) are a great medium to earn passive income, owing to their unique features. A CEF is a special type of mutual fund that doesn't issue new shares and unlike standard mutual funds, you can buy and sell CEFs like a stock.
Just like stocks, closed-end funds are listed on the stock exchange. This allows the investors to keep a check on the price movements in the market.
Passive Income investments can greatly help in earning but at the same time, it is important to weigh the expected returns associated with Passive Income opportunities against their potential losses.
So, now you know when people say “earn money while you sleep”, they are referring to Passive Income. To get going and to build Passive Income, open a Demat account today!
Connect with mastertrust to make the most of your Passive Income and make your money work for you.