Do you know which is the best source of passive income?

April 3, 2023

The best source of passive income

Many of us strive to develop a passive income stream for a variety of reasons, including generating income for a living, diversifying our income, increasing our income, putting extra cash to good use, and a mix of all or some of the above based on our circumstances.

Before we proceed to exploring some good passive income ideas, let’s understand what is passive income?

Regular income from a source other than employment or a full-time business is referred to as passive income.

There are many ways to produce passive income; let's look at the risks and benefits of a few popular passive income options.

5 Best Passive Income Sources

🔵 Fixed deposit

Fixed deposits, as the name implies, offer investors a steady fixed stream of income while posing little risk. Returns, on the other hand, are minimal, and they are vulnerable to reinvestment risks. Risks of interest rate change, when the original fixed deposit matures, are referred to as reinvestment risks.

Fixed deposit investments hold merit for investors with a short investment horizon. As returns don't always keep up with inflation, thereby resulting in a loss of value for investors with medium to long term investment horizons.

🔵 Rental Income

For many of us, rental income is another sought-after source of investing. Investors earn a regular stream of rental income and also benefit from the appreciation of underlying assets over time. Further, the availability of tax breaks and easy availability of credit makes the asset class lucrative for investors.

While real estate investors benefit from asset appreciation, but real estate returns are also subject to market cycles. Further, Rental returns, are often in the single digits (2-4 percent). As a result, returns are not assured, particularly for those who take out a loan to finance assets, usually costing twice the rate of rental returns.

Real estate investment requires a substantial upfront investment, which limits the accessibility of real estate as an asset class and/or the ability to diversify. For the few who own real estate portfolios, a large portfolio of wealth is tied up to asset class which is illiquid and inaccessible at the time of need.

🔵 Post office schemes

Post office schemes can be a reliable source of passive income for individuals seeking low-risk investment options. These schemes, offered by national postal services in many countries, typically include fixed deposit accounts, monthly income schemes, and senior citizen savings schemes. Investors deposit a lump sum amount, and in return, they receive regular interest payments or monthly income, depending on the scheme chosen.

The interest rates are predetermined and often competitive, providing a stable and predictable passive income stream. Post office schemes are backed by government guarantees, making them relatively secure. While the returns may not be as high as some riskier investments, the stability and safety they offer make them an attractive option for those seeking a steady and low-maintenance source of passive income.

🔵 Unorganized money lending

Individuals lend to known persons in their network or area in unorganized money lending, which is one of the oldest sources of passive income. While the returns are good, the individual's capacity to recover advances is critical to the success of this source of income (this is not for everyone). Loans being made to known individuals, there is typically little or no paperwork employed during the process.

This limits the individual's ability to employ legal measures to recover the loan. Secondly, lenders do not have access to credit bureau reports, and borrowers can go scout-free, posing a moral hazard in which borrowers can default on purpose, putting lender's money at risk.

Furthermore, Unorganized lending is not completely passive because it necessitates the lender's continual time and effort in following up on payments and reinvesting the money recovered.

🔵 Online or offline Business

Establishing a new side business is frequently started as a hobby or as a lucrative source of passive income. The founder's managerial qualities and know-how are critical to the business's success. Given the success of the venture is linked to the skill of the individual, this is not a suggested source of passive income for everyone.

Given the limitation of existing sources of passive income, we believe India deserves to have a new asset class, which meets all the key expectations of passive investors.

We at IndiaP2P are building this much-needed new asset class for passive investors which meets or exceeds all investment risk and return expectations of Investors. To know more set up a call with us by choosing a time of your convenience here.

We summarised the overall assessment of various sources of passive income in the below table.