Hi sir I'm hemanth working in postal department with 21k and doing sip of 7k in 9 Mfs from past 3 years and 1 lakh in direct stocks....can u suggest me to do something else to increase my passive income
Ans: Hi Hemanth! First, let me congratulate you on your disciplined investment approach. Investing Rs. 7,000 monthly in SIPs and holding Rs. 1 lakh in direct stocks is commendable. Let’s explore how you can increase your passive income.
Understanding Your Current Investment Portfolio
You’re currently investing Rs. 7,000 per month in 9 mutual funds and have Rs. 1 lakh in direct stocks. This is a great start and shows your commitment to building wealth. Here’s how you can optimize and diversify further.
Diversifying Mutual Funds
While investing in mutual funds, diversification is key. You’ve chosen 9 mutual funds, but it's essential to review their categories and performance regularly.
Types of Mutual Funds
Equity Funds: High risk, high return. Suitable for long-term goals.
Debt Funds: Low risk, stable returns. Ideal for short to medium-term goals.
Hybrid Funds: Mix of equity and debt. Balances risk and return.
Advantages of Mutual Funds
Professional Management: Managed by experts.
Diversification: Spreads risk across various securities.
Liquidity: Easy to buy and sell.
Evaluating Direct Stocks
You have Rs. 1 lakh in direct stocks. It’s crucial to regularly review and assess their performance.
Benefits of Direct Stocks
Potential for High Returns: Direct ownership of company shares.
Control: You decide when to buy or sell.
Risks of Direct Stocks
Market Volatility: Prices can fluctuate widely.
Need for Research: Requires constant monitoring and analysis.
Exploring Other Investment Options
To increase your passive income, consider diversifying into other investment avenues. Here are some options:
1. Systematic Investment Plan (SIP)
Continue with your SIPs but ensure they are well-diversified. SIPs offer the benefit of rupee cost averaging, reducing the impact of market volatility.
2. Fixed Deposits (FDs)
FDs are a safe investment option offering fixed returns. Though the returns are lower compared to equities, they provide stability.
3. Public Provident Fund (PPF)
PPF is a long-term, government-backed investment. It offers tax benefits and a decent return, making it a safe and attractive option.
Generating Passive Income
Passive income streams can provide financial stability and additional income. Here are some ideas:
1. Systematic Withdrawal Plan (SWP)
SWP allows you to withdraw a fixed amount from your mutual fund investments at regular intervals. This can provide a steady income stream while your remaining investment continues to grow.
Benefits of SWP
Regular Income: Provides a predictable cash flow.
Capital Preservation: Only part of your investment is withdrawn, leaving the rest to grow.
Tax Efficiency: Only the gains portion is taxed, which can be more tax-efficient than regular income.
Power of SWP
SWP harnesses the power of compounding and market growth. By withdrawing only a portion, your principal amount continues to earn returns. This can provide a sustainable income stream over a long period.
Importance of Financial Planning
A solid financial plan is crucial for achieving your financial goals. Here’s how to go about it:
1. Set Clear Goals
Define your financial goals, both short-term and long-term. This helps in creating a focused investment strategy.
2. Budgeting
Create a monthly budget to track your income and expenses. This ensures you have enough savings to invest.
3. Emergency Fund
Maintain an emergency fund to cover 6-12 months of expenses. This provides financial security in case of unforeseen events.
Power of Compounding
The power of compounding is a critical aspect of wealth creation. It allows your investments to grow exponentially over time.
Example of Compounding
Investing Rs. 10,000 monthly at an average annual return of 12% for 20 years can significantly grow your wealth due to compounding.
Regular Review and Rebalancing
Regularly review your investment portfolio. Rebalance it annually to maintain the desired asset allocation and achieve optimal returns.
Benefits of Actively Managed Funds
Actively managed funds are controlled by fund managers who make strategic decisions. Here’s why they are beneficial:
Flexibility: Managers can adapt to market changes.
Potential for Higher Returns: Can outperform the market.
Risk Management: Fund managers can mitigate risks.
Disadvantages of Index Funds
Index funds mimic the performance of a market index. Here are some disadvantages:
Lack of Flexibility: Cannot adapt to market changes.
Market Risk: Exposed to the entire market’s ups and downs.
Lower Returns: May not outperform actively managed funds.
Disadvantages of Direct Funds
Direct funds have no intermediary, so you save on commission. However, there are drawbacks:
Lack of Guidance: No professional advice.
Time-Consuming: Requires constant monitoring.
Higher Risk: Without expert advice, the risk of poor decisions increases.
Benefits of Regular Funds through CFP
Investing through a Certified Financial Planner (CFP) offers several benefits:
Professional Advice: Expert guidance on fund selection.
Regular Monitoring: Continuous review and adjustments.
Tailored Portfolio: Customized investment strategy based on your goals.
Tax Planning
Effective tax planning enhances your savings and investment returns.
1. Utilize Section 80C
Maximize your deductions under Section 80C through investments in PPF, ELSS, and other eligible instruments.
2. Leverage Section 80CCD
NPS contributions offer additional tax benefits under Section 80CCD.
3. Health Insurance
Premiums paid for health insurance provide deductions under Section 80D.
Estate Planning
Estate planning ensures your assets are distributed as per your wishes.
1. Will
Draft a will to specify asset distribution. This prevents legal complications and ensures your wishes are honored.
2. Nominees
Appoint nominees for your bank accounts, insurance policies, and investments. This simplifies the transfer of assets in case of your absence.
Final Insights
You’re doing a fantastic job with your investments. To increase your passive income, consider diversifying further and exploring new investment avenues. Regularly review and rebalance your portfolio, and consult a Certified Financial Planner (CFP) for personalized advice.
Stay disciplined and focused on your financial goals. Small, consistent efforts can lead to significant financial growth over time.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
