Passive Income: Meaning, Ideas and Earn from Investments

Wouldn’t it be wonderful to just relax and sip some juice at the beach and make money while you are at it? Seems too good to be true, doesn’t it? Well, hundreds of thousands of people do it every day. Curious to know more? Read on!

What is passive income?

Wondering what is passive income? It is an earning that comes in regularly without you having to put in effort or time. When you are able to establish an independent stream of income—by investing time and money initially—you can eventually start to earn passive income.

In other words, it means, you can earn money when you are not necessarily working.

How to generate passive income

Nobody would say no to earning passive income; however, there is a lot of work involved in the beginning.

You must spend time working actively while you set up your second income stream and be willing to do this consistently for a certain period.

Passive income means less stress and more time on your hands to do the things you enjoy.

However, it does involve a considerable amount of effort in pursuing active income even for a few years. So, you must keep working and wait till it kicks in.

Benefits of building passive income

There are seemingly great benefits to building another income stream. When you compare active income and passive income, you realize that the biggest advantage that the latter offers you is the freedom of time and money.

Let’s understand some more advantages of passive income.

Earn money any time, any place

When you are actively working for money, you will need to put in regular hours to earn your paycheck.

However, you can earn secondary income even if you are unwell, traveling, or simply not in the mood to work.

Make time for the things you love

Be it spending time with your family or taking a vacation, you can focus more on the things you love.

Invest your resources wisely

When you no longer need to work for money, you can start investing your time in your learning a new hobby, trying a different career path, enhancing your skills, and much more.

Achieve your goals easily

Wouldn’t it be great if you had a penny every time you longed for money to make something happen?

Well, you can put an end to your worry and actually start to achieve your short-term and long-term goals one at a time if you have one or two passive income streams set up.

Reduce stress

Having additional income increases your financial stability and margin. It improves your liquidity and ensures you are capable of handling emergencies and making big-ticket purchases.

So, if you need a reliable way to overcome financial stress, start building a passive income stream today.

Passive income investments

So far, we have looked at what goes into generating another source of income and what possible benefits we can enjoy from it.

Now, let us look at a few examples of passive income.

1. Real Estate Rental Income

Buying residential or commercial properties and renting them out can generate a steady stream of income. You can choose high-demand areas for investing in plots or properties to ensure your property remains occupied. Maintenance costs, property taxes, and potential vacancies should be considered. Real estate requires significant upfront investment and due diligence in documentation, but can yield consistent long-term returns.

2. Fixed Deposits (FD)

Bank Fixed Deposits (FDs) are a traditional form of savings with guaranteed returns. While the interest rates offered by FDs are lower compared to other investments (typically 5–7% annually, and more for Senior Citizens), they are considered safe. FDs are a great option for risk-averse investors looking for predictable, low-risk returns over a specified tenure.

3. Dividend-Paying Stocks

Dividend-paying stocks offer a portion of a company’s profits to shareholders, typically on a quarterly basis. Companies like Tata, Infosys, and ITC offer good dividend yields. Research the company’s history and do fundamental analysis about financial health, and dividend track record before investing. Dividend income can be reinvested for compound growth or withdrawn as passive income.

4. Peer-to-Peer Lending (P2P)

P2P lending allows individuals to lend money to borrowers on platforms like Lendbox, LenDenClub, Faircent, LiquiLoans, and many other for generating interest income. It bypasses traditional banks, offering higher returns, though with higher risk. Evaluate borrower profiles carefully, diversify loans across multiple borrowers, and understand that loan defaults can impact returns, making it a higher-risk investment.

5. Mutual Funds

Mutual funds pool money from multiple investors to invest in stocks, bonds, or other securities. Equity mutual funds offer higher returns but come with more risk, while debt funds are more stable. SIPs (Systematic Investment Plans) allow for regular investments, and income from mutual funds can be reinvested or withdrawn for passive income.

6. Systematic Withdrawal Plan (SWP) in Mutual Funds

SWP allows investors to withdraw a fixed amount from their mutual fund investments regularly. It provides steady income while allowing the rest of the investment to grow. Ideal for retirees or those seeking regular income from their corpus. This plan can also mitigate tax liability by withdrawing systematically.

8. Public Provident Fund (PPF)

The PPF is a government-backed long-term investment scheme with a 15-year tenure. It offers guaranteed returns and tax benefits under Section 80C. The interest rate is revised quarterly and is usually higher than FDs. PPF is an excellent option for conservative investors seeking risk-free, long-term passive income post-maturity. You can invest in PPF with Post Office or with banks.

9. Real Estate Investment Trusts (REITs)

REITs are companies that allow individuals to invest in commercial real estate properties without buying them directly. REITs pay dividends from the rental income generated by properties. REITS are listed on stock exchanges, and are easy to trade and provide liquidity, making real estate investment accessible with lower capital compared to direct property investment.

10. National Pension System (NPS)

NPS is a government-sponsored retirement savings plan, where individuals contribute regularly and receive a pension post-retirement. It invests in a mix of equity, bonds, and government securities, offering moderate returns with tax benefits. While the corpus grows, a portion can be withdrawn, providing a steady post-retirement income. There are two segments that you can invest in: Tier-I and Tier-II.

11. High-Yield Savings Accounts

Some online banks in India offer high-interest rates on savings accounts compared to traditional banks. These accounts are easy to access and liquid, but the returns may not beat inflation. They’re ideal for parking emergency funds or short-term savings, offering convenience and higher returns than regular savings accounts. Currently, some banks offer interest rate from 2.5% to 4% per annum on average and 5% to 7% per annum on the higher side (for specific savings account type).

12. Invest in Gold (Digital or Sovereign Gold Bonds)

Digital gold or Sovereign Gold Bonds (SGBs) offer an easy and safe way to invest in gold. SGBs, issued by the government, offer 2.5% annual interest plus the appreciation in gold prices. They have an 8-year tenure, and the interest is paid semi-annually, making it a low-risk, inflation-beating passive investment. And the risk to keep it save it mitigated as you don’t have to take care of physical gold.

13. High-Yield Corporate Bonds

Often referred to as non-investment grade or “junk” bonds, Corporate Bonds are debt securities issued by companies with lower credit ratings, rated by agencies like CRISIL, CARE, or ICRA. These bonds offer higher interest rates to compensate investors for the increased risk of potential default compared to investment-grade corporate or government bonds. You can invest in these bonds at stock exchanges like the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange).

Passive income ideas

So, how can you generate this type of income? Here are three popular passive income sources that you can consider.

Thanks to the Internet, there are so many avenues to make money online passively. If you have the capital to launch a small online store, then you can make passive income through e-commerce.

If not, you may work with minimal to no investment by launching a blog, a podcast, a YouTube channel, or even an online course. However, the Internet does require a large amount of time and patience before you start earning some income.

Let us understand this with an example. Assume you run a blog on dessert recipes for vegans and now you are working on putting them all into an e-book. There will be some work involved in creating the e-book but once it is ready, every time someone purchases it, you earn revenue. At some point, all you need to worry about is promoting the e-book and earning your income.

Let’s list down some of the ideas below-

Affiliate Marketing: Promote products and earn a commission on sales through referral links.

Podcasting: Start a podcast, monetize through sponsorships and listener donations.

YouTube Channel: Create video content, monetize through ads, sponsorships, and memberships.

Print-on-Demand: Sell custom-designed merchandise like T-shirts and mugs; third-party services handle printing and shipping.

Blogging: Write articles and earn income through ads, affiliate marketing, or sponsored content.

Online Courses: Develop and sell educational courses on platforms like Udemy or Teachable.

Stock Photography: Upload photos to stock websites and earn royalties on each download.

Automated Webinar Sales: Pre-record webinars and sell products or services during the presentation.

Domain Name Flipping: Buy and sell domain names for profit.

Sell Digital Art/Designs: Offer digital art or designs for sale on platforms like Etsy or Creative Market.

Influencer Marketing Agency: Connect brands with influencers and manage campaigns for a commission.

Traditional investments

If you are looking for a popular passive income idea, then traditional investments are the way to go.

Fixed-income securities and those that pay a regular dividend are preferred by many individuals because these do not require too much effort.

Yes, you will need to conduct extensive research to find the security that works for you, regularly monitor your investment portfolio, and work out re-investment ideas, if any.

You can also choose to reinvest your earnings if you do not need cash.

Rent

Another popular passive income source is earning rent from a property you have purchased.

The advantage of investing in real estate is that the property value does not fluctuate heavily, and you can finance it with a home loan.

However, not everyone earns a sizeable amount of income through real estate. You might need to run around for maintenance, repairs, or tenants and that’s not always rewarding.

To earn rental income more systematically, you may consider hiring a property manager.

They will help you find a good tenant, manage your maintenance and repairs, and handle everything else related to your property on your behalf.

Role of passive income in achieving financial freedom

Passive income is the steppingstone to achieving financial independence. You are financially free when your secondary income is able to cover your monthly expenses without you being in active employment or running a business.

Not having to worry about your daily expenses while being able to live life to its fullest is a dream that can be achieved by generating passive income when you can.

What’s more, anyone can become financially independent by making the right moves. You do not need to come from a wealthy family.

All you need to do is ensure you put in both your time and money initially. Investing or building a parallel source of income is critical. And by now, you already know of reliable passive income ideas.

Moreover, you must consider a few other tips. To begin with, ensure that you first clear off any debt that is due. Cut down on large monthly expenses.

The sooner you go debt-free, the quicker will you be able to build income and wealth.

Also, ensure that you always have enough saved for a rainy day. An emergency fund or an insurance policy you can fall back on in times of need is a must.

To sum it up, finding the means to create income is not enough. You also need to ensure that you continue to keep track of your investments and be on the lookout for opportunities that can ensure a consistent flow of passive income.

These days, most people want to experience ‘instant gratification.’ However, to start enjoying passive income, you need to stop looking for the immediate outcome and change your mindset to expect results in the due course of time.

Similarly, you must also be willing to spend some time managing all that you have built or created. And if you find it difficult to do it yourself, then it is advisable to hire a financial expert.

Another aspect you will need to consider is tax. Your passive income is still taxable, so ensure that you provision for it. If you are keen on higher-yielding stocks or investments, it is best to consult a financial planner or an investment specialist.

Passive income generation is absolutely something to actively pursue, especially with the unpredictable times we live in. Start small and as you find ideas, continue to keep at it.

Before you know it, you will have a steady source of income in addition to your 9-to-5 job or your business.