Passive income is any income generated with low effort, at least compared to the effort required to generate your primary source income. Due to advancements in technology and medical facilities, humans are outliving their expected life expectancy. At this point, having a steady passive income has become essential for almost everyone.
Passive income can be earned by investing in financial instruments and businesses or offering services that grow in value with time. Thus, it involves a progressive growth of income where the earner must spend a certain amount of time to generate the revenue.
The concept of passive income is not yet popular among the common folk. But it is something the rich regularly engage in. It is one of the powerful methods to become and stay wealthy. Earning income from multiple streams does not come with a limitation, unlike a regular 9 to 5 job where the income is fixed.
Did you know?
There are three usual categories of income, i.e., active, passive, and portfolio income.
Types of Passive Income Generation in India
Earnings from a rental property or another business in which you are not actively involved are referred to as passive income. It is, in essence, money that does not require a lot of "active" labour to earn. The main objective is to earn money while relaxing. To do so, you may need to commit some time or money up front to develop something, which will then help you produce income down the road with simply a little extra effort. There are two types of passive income sources in India.
Additional income is earned from investments such as: -
- Interest from FD – The initial amount invested gets compounded periodically, thus generating interest.
- Rentals from real estate – investing in a rental property is an effective way of earning passive income in India. The risk involved in this is the repayment of mortgage and maintenance costs.
- Dividends through mutual funds – Dividends are paid at regular intervals on the stocks held. The higher the number of stocks or shares, the higher will be the payout.
- REITs (Real estate investment trusts) – An investment where you don’t get a rental income, but you get income in the form of a dividend. E.g., if a company is investing in building an IT Park, which pays rent to the company, and you have purchased REITs of this company, a chunk of the rental income is paid in the form of dividends. This is unlike shares and investing in real estate.
- The traditional method also categorises investing in shares, bonds, futures, and options (with good knowledge).
An initial investment of little money and time is required in this method. However, the amount can be allowed to compound over a period, making the money work for you 24/7.
This method requires an excellent creative mind as it is necessary to put some effort into certain unexplored regions. Communication, consistency, core knowledge, and creativity form the foundation to succeed in this method. It is also called online passive income, as this is mainly carried over the internet. There are several creative streams through which passive income can be generated. A few have been mentioned below:
- Youtube channel – Income is generated through ads viewed by viewers. New videos are an active source of income, while older videos form a passive source of income. It is required to post new videos at regular intervals to be on top of the algorithm.
- Blogging and vlogging – Blogging and Vlogging require considerable time, effort, and money. You will need to put in at least two years of sincere effort to see money coming in. The risk in both these streams is that you will be at the mercy of internet algorithms.
- Digital products like online courses, e-books, forum writings, articles, etc. – Selling a course online or preparing a podcast involves a lot of initial effort. Core knowledge plays an important role here.
- Affiliate marketing/programs – This involves promoting a product or a service on behalf of a company and getting paid by them. A link of the third party must be promoted and shared. A commission of around 3% to 9% can be earned on each click and purchase via the link.
- Creation of Software products.
- Create websites and designing.
- Advertising Commission through Google Ad Sense.
- Referrals programs.
- Creation of membership sites.
- By becoming resellers for telemarketing companies like E-Bay etc.
- Creation of websites for different subjects and information such as personal finance, Insurance, and Games.
- Internet marketing and telemarketing through the internet.
An online business has its own challenges, and it is not easy to get rich through it. Rather it is a start of a long journey. It takes time and effort to develop the required skills and put them into action, and turn them into a steady income. Many budding entrepreneurs have been formulating ways to generate income online and consequently coming up with legitimate and efficient ways to make passive income.
Benefits of Generating Passive Income
- You achieve financial independence and can manage your needs in life without having to depend on a regular job. The passive income generated takes care of all your basic needs, so you don’t need to keep pursuing a regular job.
- Goals can be achieved faster. Important milestones in life, like owning a house, a car and getting your child a foreign education, can be done with ease.
- Freedom to work from wherever you want and whenever you want.
- Income is generated 24/7 and is not dependent on a fixed time.
- Multiple streams of income generation can be created parallelly.
- The amount of income you generate depends upon capability and hard work.
- You can have more free time to spend with your family. No physical presence is needed to generate passive income. Thus, the quality of life improves significantly.
- Your confidence increases as you start feeling secure due to the generation of passive income.
- Passive income acts as a cushion in times of crisis when there is a loss of a regular job.
- Lastly, one can become capable of contributing more to the community and charitable societies.
Drawbacks of Passive Income
Like every other business, passive income also comes with its own drawbacks. Below mentioned are some of the disadvantages of setting up multiple sources of income:
As every business comes with its own risks, the same holds good with generating passive income. The amount of risk varies depending on the type of income generation. Investment in shares, debentures, REITs, new business, etc., all come with a high-risk factor. So, the investor is expected to have a sufficient risk appetite.
The passive source of income requires the initial monetary investment. Most of the sources, like shares, fixed deposits, investment in the business, etc., require an initial investment on your part. So, you first need to earn the initial amount to make more money.
The main drawback of the passive source of income is that they can’t be fully reliable. This is the reason they are called passive income sources. There always require a primary or active source of income. The active source is your primary source of income. Here you put in your time and efforts to earn money. This earned money can give you a passive source of income. This is because you cannot fully rely on passive sources for your everyday living expenses, at least in the initial stages.
Effect of market conditions
Almost all the alternate sources of income are highly affected by the market condition prevailing in the economy. They are affected more by external factors than the efforts you put in. This makes them volatile income alternatives. For example, you cannot control the price of shares in which you have invested your money in. You also cannot force anybody to be your tenant. During situations like covid, real estate took a massive hit as most tenants vacated their rented accommodation in cities and moved to their hometowns. Thus, external market factors can often make or break your source of passive income.
To conclude, it is very much required to have an alternate source of income to have good financial stability. The above-discussed methods are a few of the best passive income ideas out there. The right idea must be chosen depending on each person’s personal preference, interest, capability, availability, initial funding, etc.
Different streams of passive income, benefits, and drawbacks have been discussed above. Depending on your preference and risk factor, you can consider the one that best suits you. You can target how much you want to earn in a specific period and move towards achieving your goal. Go ahead and enjoy the extra income flow with an input of little time and effort.
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