An investor should first invest in upgrading their financial IQ before investing in an asset as investing in the mindset and skillset gives the highest return.
As the economy is in turmoil and the markets are crashing, everyone is concerned about how to get through the situation. Their biggest concern is their increasing lifestyle expenses and reduced income. Since the Equity market has crashed and Real Estate has been already going through a bad decade in terms of returns and liquidity, most investors are looking for better options to invest wherein they get decent returns and/or Passive Income.
The first thing we need to understand is that Passive Income is a very wide concept and includes several assets so one or two assets not performing well at any particular point of time should not affect your Passive Income goals or needs. We all know that recession/depression doesn’t last for long like how Boom doesn’t stay for long. These are all phases. We need to be prepared for this and relying completely on one or two assets may increase your chances of losing a chunk of Passive Income. This is where diversification of wealth comes into the picture as a critical piece of a puzzle many can’t solve.
Here are a few pointers for someone who wants to make passive income given the crash in Equity and Real Estate:
1. Debt Investment
This traditional form of investing has mostly been unorganized until the 20th century in India. Debt investing is simply borrowing money in lieu of interest which is mostly periodic in nature. While most of the people have burnt their hands in private lending or corporate lending via debt mutual funds or otherwise, investing in government based bonds is considered a very safe and stable way to make monthly passive income.
Instruments like RBI bonds or Government-owned entities have their listing on the stock exchange for the retail investor to participate. In an Unpredictable time like this, shifting your funds from other Assets or fresh investment into Debt will be a smart move.
India loves gold, but is it enough? That’s a trick question. Gold acts as a natural hedge against stock market crashes as well as is a reserve that everyone should have and that is an adequate way. Just buying jewelry isn’t enough as it’s an ornament and shouldn’t be treated as an investment. This is where most investors go wrong. What they should actually be doing is buying Sovereign Gold Bonds which come with 2.5 per cent -2.75 per cent annual interest and are tax-free on maturity.
This way they are able to build a reserve as a part of wealth, a hedge against their equity exposure as well as get yearly fixed Passive income too. In the same light, gold has around 40 per cent -50 per cent returns in this calendar year (to date).
3. ETF (Exchange-Traded Fund)
Even though the Equity market is not doing well, one should stick to Index ETFs for monthly investments and invest in dividend-yielding stock investment strategies for passive income. Many such strategies are available using the PMS (portfolio Management Services) or AIF (Alternative Investment Fund) however they come with high investment tickets (PMS = Rs 50 lakh and AIF = Rs 1 Cr.) which is unaffordable for most.
On the contrary, there are low ticket investment strategies curated by research analysts who can deliver similar results. Losing hope in a market crash doesn’t help anyone, finding alternatives, and planning strategic moves based on thorough research does.
4. Real Estate
Given a big shift in the economy, depending on investment into existing styles of real estate investments will not help you sail through the storm. Gone are those days when you could buy a plot and sell it with a 30 per cent markup in 1 year, gone are those days when you could pay 10 per cent to a builder and expect 12 per cent assured return without very high risks. The new-age real estate requires a lot more.
This is a time to evaluate the current real estate portfolio and make some transformative changes. One such change is considering warehousing based income given residential isn’t enough, commercial/industrial can be severely hit and plots don’t have any passive income. Apart from that, there are many financial instruments such as REITs and InvITs which are liquid, high yielding, stable, and tax-efficient as well can generate passive income to another magnitude to a wise investor.
In a nutshell, an investor should first invest in upgrading their financial IQ before investing in an asset as investing in the mindset and skillset gives the highest return. The next step would be to consider the above recommendations to create a stable monthly Passive Income for life.
by Arpit Arora, Passive Income Coach, AskTheWiseGuy