What is Passive Income in Mutual Fund Investment?

You might have definitely heard the term “passive income” at least a few times in the past. After all, there are now so many ways in which people are earning passive income. From creating mobile apps, selling courses online, affiliate marketing to P2P lending, you can earn passive income in many different ways.But can your mutual fund investment help you earn a passive income? Yes, it can. Take a look at what passive income means and how you can earn it from your mutual fund investments-

In simple words, passive income is any kind of income that you earn apart from your employer or primary source of income. In most cases, such sources of income require you to put in concentrated effort only for a short duration but earn from the same source for a significantly longer duration.For instance, if you create a mobile app and sell the same on Android or iOS platforms, you might be able to generate an income for a very long duration if people like using your app. The same can also be done with your investments. For instance, you can earn rent from your real estate investment, dividends from your stock investments, and interest from your FD investment.

Apart from the options discussed above, you can also consider investing in mutual funds to earn a passive income. There are a few different mutual fund categories that can be considered an excellent source of regular passive income-

1. Dividend Mutual Funds

These are equity mutual funds that mostly invest in companies with an excellent reputation for paying regular dividends. So, rather than researching and finding individual dividend-paying stocks on your own, you can invest in a basket of such stocks with dividend mutual funds.The dividends are generally paid every six months or once a year. But note that the dividend amount and the frequency are not fixed.

2. ETFs

Exchange-Traded Funds or ETFs are mutual funds that can be purchased and sold on exchanges just like stocks. Once invested, you are free to sell the units of your ETF as and when you like. Most of the ETFs invest in stocks, bonds, and commodities.Most ETFs are generally very liquid and have excellent returns potential, especially compared to other types of mutual funds like liquid funds and short-term debt funds.

3. Index Funds

If you’ve understood what is a passive income, it shouldn’t be difficult for you to understand how index funds are an excellent option. These are passively managed funds with portfolios similar to their benchmark index. So, there is no need for the fund manager to make changes to the portfolio regularly.Changes are only made when index composition is changed. This ensures that index funds have a low turnover rate and management costs but high returns potential.

If you want to earn a passive income from your mutual fund investments, these are some fund categories you can consider. But note that every fund category is different and varies in terms of its functioning, risk profile, and returns potential.If you are a beginner, it'd be wise to start small and get a hands-on experience of how these funds work. You can consider investing a larger amount after gaining some experience.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.