Have you heard of passive income? The job you are in endows you with a monthly salary. That is Active income because you work for the money. Sometimes with passion but mostly in a mechanical and tedious manner.
Passive income is where the money works for you.
Say you are opening a fixed deposit. After certain years, the principal you invested would contribute in additional interest depending on the interest rate. It’s one source of passive income. However, there are multiple areas wherein the investment would yield massive returns.
But high returns generally come with high risks. Professional investors would typically gamble with the high-risk investments as they have the potential to build up their portfolio in a short period of time. However, their gamble would be backed up by their years of indispensable experience and knowledge about the functioning and performance of the market.
Furthermore, there exist both high-risk and low-risk investments that help in diversifying your portfolio. Low-risk investments generally furnish low returns like having a savings account or a deposit scheme.
Some of the low-risk investments constitute:
- Savings Bank account (3.5% to 6%)
- Fixed or Recurring deposit (Bank and Post office) – 6.5% to 9%
- Government bonds – 8%
- PPF – As per Govt. norm. Now it is at 8.5%
- Debt Mutual Fund – 8% to 10%
High-Risk investments involve
- Real estate
- Stock market
- Mid and Small Cap schemes Mutual Funds
Let’s take a detailed look at five major investments with substantial returns and the risks associated with each investment.
This is one asset class that involves investment in stocks and shares. The Bombay Stock Exchange (BSE) and National Stock Exchange(NSE) list the stocks of various organizations. However, it comes under the secondary markets. The index for 1-3-5 year return currently stands at 13%, 8% and 12.5% respectively.
You need to possess an inordinate amount of market knowledge to invest directly in equity. This is because direct equity is inherently volatile in nature and has massive risks. The stock may suddenly shoot down to zero and the factors responsible may not be identified as there could be a multitude of them.
But the silver lining is that equity has the potential to deliver higher returns compared to all asset classes.
Initial Public Offering (IPO)
IPO is the primary market. As the company revenue and profits shoot up, the share price surges expeditiously. For example, when Apple initially went public in 1980 it had a share price of $22. Now it’s share price stands at $255. Those who invested in 1980 would have had their investment grown 10 times.
But there are potential volatility risks as the graph of the share price can dwindle between positive and negative. This may be due to a loss in the company’s profits or due to economic transitions. Unless you are an expert in the share market, you won’t be able to predict the conditions.
Also if the company goes out of business, you will be facing an absolute loss of your investments. So it’s recommended to gain immense knowledge in the share market before investing.
Real estate is widely accepted as one of the markets which have the potential to yield tremendous returns. The volatility is really low and it can yield monumental returns over a long course of time. Considering Pan-India, the average yield per sq.ft currently stands at 3% but there are some micro-markets where the yield goes up to 4.5%.
In the rental market, properties with a value of less than Rs. 6000 per sq.ft provided a yield of more than 3% while properties priced more than Rs. 6000 per sq.ft yielded somewhere between 2.4-3%. So evidently it’s safe to invest in affordable properties.
There are options of Residential Real estate and Commercial Real estate to invest in and each comes with its own set of benefits.
But Real estate necessitates a substantial amount of capital upfront. And liquidating it can sometimes take a prolonged amount of time.
Large-cap Mutual Funds
This comes under equity investment except you won’t possess direct control over the stocks. A fund manager who is an expert in investing and has immense market knowledge would handle and take care of the stocks. The capital would be invested in the stock of large companies so as to initiate massive growth in a short time.
However, it requires a minimum tenure of 3 years but you would be provided with multiple options pertaining to withdrawal.
Savings and Deposit scheme
The scheme for savings and deposits constitute a very low risk. Both Fixed Deposit and Recurring Deposit would endow you with a generous amount of money after the requisite amount of time.
They are generally preferred by entry-level investors who are just looking to play safe. However, the returns from these schemes would fall into the low level.
An investment ensures that you would be entitled to a secondary source of income. It would enrich you with luxury at the best contributing to additional investment opportunities but foremost, it would bequeath you with security.