Are you among those individuals who think investing some of your savings is a safer and guaranteed way to generate alternate income? If yes then you are undoubtedly right !! For this you just need to build a strong portfolio of diversified investments to achieve a passive income to live on. This strategy of investing is called income investing.
So let's start from the beginning.
What is an income investment?
Investing is putting collectively a collection of assets such as stocks, bonds, mutual funds, and real estate that will generate the highest feasible annual income at the lowest possible risk.
There are so many investment options available in India, some of them are discussed below:
1. Dividend based Income
Dividends are paid by the companies on the basis of their earnings to the shareholders or investors on a per-share basis of the stock. If the investment is in Mutual funds that have funds into dividend stocks, then the investor earns a share of that company via dividends on a yearly or quarterly basis.
The taxes are to be paid on dividends as well, and the regular tax rate applies to these Ordinary dividends, whereas there are some dividends labelled as “qualified” and are taxed at a capital gains rate that is generally lower.
Shares as an investment instrument for an income investing portfolio include company stocks that pay regular increasing dividends. Dividend payments help generate consistent results over time.
Monthly Income Plan
Monthly Income Plans (MIPs) are mutual fund plans. The fund houses payout their investors with an amount monthly which is not fixed and is totally based on the performance of the funds. Since the return is dependent on the performance of funds, it is never guaranteed. Also, there are chances of negative returns as well. So, before deciding to invest in a monthly income plan, you must consider your profile.
2. Interest based Income
A person will earn income as an interest in investments that generate interest in the deposition of funds into bonds, certificate of deposits, money market instruments, etc. Earlier, the investors who require some cash can withdraw money from their interest income without disturbing the principal amount invested. But nowadays, the interest rates are very low hence; it’s really difficult to expect the same return from dividend and interest consistently.
Bond is one of the types of debt instruments available in India. This means investors lend money to the debt taking company in exchange for a bond and return for the bond, then the company is obliged to pay the fixed rate of interest on the principal amount.
Bonds VS Stocks
Let’s understand this by taking an example, assume you buy a bond for $2,500 and it pays 2% annual interest for a duration of10 years. That means every year, you’d receive $50 in interest payments, every month throughout the year. After a time period of 10 years, you would have earned $500 in interest, plus your initial investment of $2500 also.
With bonds, you normally know exactly what you’re engaging up for, and the regular interest payments can be used as a source of anticipated fixed income over long periods. Let’s take an example of a company that has a stock price of $50 per share, and you invest $2,500 (that's 50 shares for $50 each).
Now assume, over several years, the company consistently performs well. Because you’re a partial owner, the value of your shares will increase just like the value of the company. If its stock price increases to $75 (a 50% increase), the value of your investment would increase 50% to $3,750. And you could then sell those shares to another investor for a profit of $1250. And yes ,the opposite is also true. If that company performs badly, the value of your shares could fall below what you bought them for. And in this situation , if you sold them, you’d lose money.
3. Capital Gains
A rise in the value of an asset more than its purchase price, like in an investment on real estate or stock, then the increased value is known as the capital gain, and the same will be realised after selling off the asset. The investor is required to pay taxes on the capital gains according to the period of the gain, whether it is short term or long term capital gain. The tax rates are lower in long term capital gains so it's beneficial to hold assets for long term rather than short term.
There are two types of capital gains:
- Long term capital gain
- Short term capital gain
Every individual has a different financial need. Hence, every investor has a unique investment plan as per their requirement. Some investors do invest in a lump sum, while some others like to stagger their investments and use a systematic investment plan (SIP). While some investors endeavour capital growth, and some others want a consistent income from their investments. There are many tools and facilities extended by fund houses to meet the expectations of different types of investors. One of the well-known facilities is a Systematic Withdrawal Plan (SWP).
Let us talk more about SWP - In SWP you need to invest in the growth plan of the scheme and specify a certain fixed amount required as a monthly payout. Then on a selected date units amounting to that fixed amount would be redeemed. Let's take an example, An investor would invest Rs. 10 lacs lump sum and request that Rs. 10,000 be paid on the 1st of every month. Then, units worth Rs. 10,000 would be redeemed on the 1st day of every month. During this time the investor’s remaining amount would continue to stay invested in the scheme that he/she has chosen to invest in. Click here to know more about SWP: https://groww.in/p/systematic-withdrawal-plan/