It is essential to have a distinct investment goal when dealing with any type of investment, including mutual funds. Having a goal in mind can help direct the choices you make about your investments and keep you focused on the long term. If you do not have a goal in mind, it may be difficult to figure out which mutual funds are the best fit for your requirements and how to distribute your investments across a variety of funds.
Investment goals could vary according to the investor. For instance, you could be trying to create a corpus for your retirement through Systematic Investment Plans (SIPs) in mutual funds. But is there a way to earn regular passive income from a lump sum mutual fund investment? Read on to find out.
What is passive income?
Passive income is income generated with minimal or no effort by the recipient. Typically, passive income streams require a one-time investment of money or time, after which the income is generated with minimal ongoing effort. Examples of passive income are rental income from real estate investments, dividend income from stock investments, and interest income from savings accounts or other financial instruments.
Passive income can be useful for those looking to supplement their active income or diversify their income streams. Passive income can contribute to financial stability and security by helping to even out the fluctuations of active income.
Earning passive income from mutual funds
Systematic withdrawal plans or SWP is one way to earn passive and regular income from mutual funds. The SWP is an intelligent strategy that enables you to take predetermined quantities of money from your mutual funds at frequent and regular intervals. In the same way that a Systematic Investment Plan, often known as a SIP, enables investors to make consistent investments over time toward the accumulation of a substantial corpus, a systematic withdrawal plan enables investors to access their money in stages.
With SWP, you can pick the amount to withdraw according to your needs while still putting money into the chosen plan. Although SWPs often allow consistent income inflows, the dividends and profits generated by a particular plan may not be guaranteed monthly.
You can select the periodic payment frequency that best suits your specific needs, such as monthly, quarterly, half-yearly, or annually, among other options. The value of the investment that was made is diminished by the number of units that are withdrawn, as well as by the investment’s market value.
Mutual funds dividend plans
Dividend mutual funds are a way to earn income from your mutual fund investment. These funds invest in equities of publicly traded companies that distribute cash dividends on a consistent and regular basis, often once every fiscal quarter. When you own equities in dividend-paying companies via a mutual fund, the dividend will be sent to the fund and then distributed to its investors. This provides regular income through your investment.
Most of the time, dividend mutual funds hold shares in well-known companies with a long track record of making dividend payments. These stocks are often referred to as “blue-chip stocks”. When a company pays a dividend on its stock, the amount is typically expressed as a percentage of the price of one share of stock. Your dividend will increase proportionately to the number of shares you own.
The main advantages of dividend plans are their ability to provide regular income and their performance in bear markets. When a bear market occurs, trading activity decreases. The performance of dividend funds in a bear market is typically superior to that of mutual funds that prioritize investments in stocks with rapidly increasing share values. This is because dividend-paying companies are well-established and mostly large-cap.
Conclusion
Earning passive income with a lump sum investment in mutual funds can be achieved through strategies such as Systematic Withdrawal Plans (SWPs) and dividend mutual funds. SWPs allow you to take predetermined quantities of money from your mutual funds at regular intervals while still allowing you to continue investing in the plan. Dividend mutual funds invest in equities of publicly traded companies that distribute cash dividends on a consistent and regular basis, providing regular income to investors through dividends. Both strategies have their advantages and it’s essential for you to have a distinct investment goal in mind and carefully assess the options available to determine which strategy best suits your specific needs.
