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Six ways to generate steady income

September 13, 2013 09:01 IST

Six ways to generate steady income

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Aditya Prasad

In uncertain economic times, these can help you add to your monthly income.

We are living in uncertain times. Changes tend to be sudden and quick not giving a person enough time to adjust. Loss of jobs, high inflation and high volatility in investments are some of the things we have to live with today. The security that a person used to enjoy in a 9 to 5 job, fixed deposits and insurance policies, is a thing of the past. The loss of active income source or reduction in the monthly take home coupled with burgeoning costs of daily necessities is the order of the day. It is in such tough times that one realises the importance of having a passive source of regular income.

Gone are the days when only retirees would need a steady source of passive income. Individuals today are increasingly looking for options to supplement their active income by passive incomes such as rent, interest income and dividend income.

Although real estate investment in a residential or commercial property can be a great source of passive income in the form of rent, not everybody can afford it. Debt investments or fixed income instruments are the key sources of generating a regular income. Coupled with the fact that debt offers diversification and safety of capital, it proves to be an excellent case for investment. There are also a couple of other options from the mutual funds stable, which can provide a regular source of income.

Let us look at some of the options available for a steady passive income:

The author Aditya Prasad is chief evangelist at Perfios.com and can be reached at adi@perfios.com.


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1. Real estate investment

If one can afford it, investing in a property that can generate rental income, can be a great source of passive income. With the rentals and property prices increasing at a steady pace, one can benefit not only from the steady income stream but also from the capital appreciation of the property. Commercial properties tend to provide a better rent than residential properties although residential properties may have a better appreciation rate.

One can also borrow for purchasing the property, especially house property, and benefit from the tax exemptions available. However, this borrowing should be within limits and not cause any strain on the finances. If your money is not earning as much the interest you may pay on your loan, you can increase the amount of self-funding. After all, interest paid to the bank adds to the cost of the property. We often tend to ignore this fact.


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Financial instruments providing steady source of income

There are a lot of instruments on the fixed income side, which can provide a regular source of interest income. One may not opt for these during the working years since growth in capital assumes a higher significance than the need for liquidity. As a person moves closer to the retirement stage, s/he could start looking at options for generating a steady source of passive income. Some of the options are given below.

2. Bank fixed deposits (FDs)

Instead of opting for a cumulative deposit, one can opt for the monthly or quarterly interest payment facility. Bank deposits are extremely low risk and offer good flexibility in terms of tenure but there are no tax benefits (except 5-year FDs that qualify under Section 80C).

The interest rates on FDs are governed by the ongoing interest rates in the economy. Avoid cooperative banks since the risk may be higher in such banks. Opt for sound public sector and private sector banks.


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3. Corporate fixed deposits

Companies offer fixed deposits, which usually provide a higher rate than bank FDs, the reason being that they are unsecured and hence the risk is higher. There are different options for payment of interest (monthly, quarterly etc.), which can provide a regular source of income.

It is prudent to invest only in deposits of reputed companies with superior credit rating and which have a track record of regular payment of interest and principal. Note than higher the return, higher is the risk and hence the most lucrative interest may not be the best choice.


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4. Post office schemes: Monthly Income Plan (POMIS), Senior Citizen Savings Scheme

The monthly income scheme offers a fixed monthly return in the form of interest and one can deposit a maximum of Rs 4.5 lakh and Rs 9 lakh for single and joint account respectively. POMIS earns interest at 8.4 per cent per annum (currently) and though there are no tax benefits and interest is taxable, no TDS is deducted on the interest.

The tenure is fixed for 5 years and on maturity, the person gets the principal back. POMIS can act as a safe source of additional monthly cash flow. This can be either used for meeting expenses or ploughed back into investments depending on the situation.

The Senior Citizen Savings Scheme is targeted towards the retirees since only a person aged 60 years or more can apply for this scheme. One can deposit a maximum of Rs 15 lakh in this account to earn an interest of 9.2 per cent which is payable on a quarterly basis.

The tenure of the scheme is 5 years and it can be further extended for period of 3 years.


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5. Tax free bonds

Tax-free bonds are rated long-tenure (usually 10-15 years) fixed-income securities offering annual interest at rates less than the yield of government securities of similar tenure. One can buy and sell these bonds on the stock exchanges.

Though the interest earned on these bonds is tax-free, any capital gain from sale in the secondary market is taxable. The returns from these bonds tend to be better than the post tax returns from fixed deposits. There is no cumulative option and interest is paid on an annual basis.

A large number of tax-free bond issues are lined up in the current financial year. These make a good case for investment to lock in the high interest rates.


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6. Debt mutual funds

There are a wide variety of debt mutual funds such as liquid funds, short-term debt funds, income funds, gilt funds etc. These are distinguished by type, credit quality, nature of securities they invest in and length of maturity of the securities. These funds come with a dividend payout option, which can be weekly, monthly or quarterly.

A portion of total debt in one’s overall asset allocation can be invested in these funds to serve the dual purpose of allocation to debt as well as earning regular income. However, one should be diligent to select the right fund based on the credit quality, average maturity of the securities and interest rate environment.

The current volatility in the debt market has not augured well for debt mutual funds and one should take the help of an advisor to select the right fund.

There are other income generating options such as dividends on shares and mutual funds and annuities from insurance companies (relevant post retirement).

While one must opt for growth of capital in early stages of life, building up a stream of income that is not dependent on job, profession or business is equally important to provide for a rainy day. 


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