Investments with capital appreciation along with regular passive income can be a valuable addition to your portfolio. Explore the debt assets for passive income generation.
Investment aspirations are one of the key aspects for consideration while making an investment decision. It may differ for every investor. Generating a passive income can be one such investment aspiration. It can help attain desired financial security, cater to regular expenses, provide reinvestment opportunities and more. Investors can earn passive income through debt instruments. Moreover, these instruments can also appreciate capital gains with market exposure. Debt investments provide an added security benefit. However, understanding the process of generating income through fixed-yield investments, their selection, and potential strategies is crucial.
What is Passive Income?
Income earned with minimal effort and not through a primary source is passive income. It is usually earned from a secondary source such as rental houses, investments, freelancing, patents, etc. However, it can be a crucial addition to an individual’s income to maintain financial stability and continuous cash flow. Some of the key benefits of having a passive income are as follows:
- It can help diversify the income source to reduce the burden on primary sources.
- Earning passive income with bonds and other investments can provide relief to pursue a profession, work or lifestyle.
- It is a potential source to attain financial independence early in life.
- Due to cash flow availability from passive income ideas, surplus income can be invested for long-term financial stability.
Investments are one of the best passive income ideas due to their market exposure, multiple opportunities, income like interest and dividend, capital appreciation, etc.
Generating Income Through Fixed-Yield Investments
Debt instruments are the financial securities issued by companies and government bodies to raise funds with an obligation of repayment. They are also known as fixed-income investments. Using debt securities for passive income can also help diversify the portfolio. Some of the key characteristics of debt assets aligning with the passive income generation goals are:
- Interest Income: Based on the coupon rate, a debt asset generates regular fixed income in the form of interest. The frequency of this income may differ based on the investment instrument.
- Security: Debt instruments are one of the primary obligations for the issuing entity. Therefore, they are preferred during the repayment at maturity, which provides better safety than other instruments.
- Diversification: Debt assets provide unique diversification for the portfolio. They help balance the risk and returns for the overall investments.
Types of Debt Securities for Passive Income in India
There are different types of fixed income investments for interest income that can provide desired exposure based on the return expectations and risk appetite as follows:
| Name of Debt Instrument | Issued by | Details |
| Government Bonds | Government | They offer sovereign security and can generate moderate returns. |
| Corporate Bonds | Companies | They provide better market exposure and can potentially generate higher returns. However, they are suitable for investors with high risk. |
| Certificate of Deposit | Different types of banks | It is an agreement with banks that pays businesses for their credit transaction. These are regulated by the Reserve Bank of India and generate significant interest income. |
| Debt Funds | Mutual fund houses | These are types of mutual funds investing their major assets in debt instruments like bonds. Moreover, there are other assets in the fund portfolio which provide diversification. |
| Peer-to-Peer Lending | Different P2P platforms | It is a formal structure of direct lending mediated by a registered platform. It is highly risky but can generate high potential returns. |
| Alternative Debt Instruments | Different bond platforms | Modern debt assets like securitised debt instruments are high in risk, but their unique structure can generate potential returns. |
Strategies for Generating Income Through Fixed-Yield Investments
Employing suitable passive income ideas in India based on the type of investor, their investment operations and risk profile. Some of the unique strategies for using debt securities for passive income generation are as follows:
- If the investment profile has sufficient power, invest in high-yield bonds which generate high-interest income.
- Reinvest the surplus from other investments into debt assets to generate potential returns and interest.
- Invest in debt assets with a high credit rating to stabilise regular interest as passive income.
- Investments can be planned such that their maturities line up with one another. It is known as bond laddering.
- Having a debt fund in the portfolio can also provide diversification in other assets like equities.
Things to Consider Before Generating Income Through Fixed-Yield Investments
A prime condition or aspect for investment is understanding the functioning of the concerned asset. It will help analyse the suitability and weightage of the portfolio.
- Investors should also analyse their requirements for passive income such as the specific amount, frequency and use. It will help decide the type of fixed-income instrument suitable for their portfolio.
- The coupon rate of a debt asset is a crucial indicator of the potential interest income. The type of rate, its frequency, market conditions, etc., should be checked before investing.
- Investors can also determine the final income after taxes for better accuracy. In India, listed debt instruments, held for more than 12 months, are taxed at 12.5%. Otherwise all listed and unlisted debt instruments are taxed at slab rate.
- Investing in the debt asset would also require investors to check the risk levels and credit rating of the instrument.
Overall, the process of investing in debt securities for passive income should be preceded by an informed analysis of the asset, its alignment with the portfolio and investment aspirations and overall market conditions.
Conclusion
Passive income is earned through sources not primary to the individual but can be a significant source to support financial management. Investing in fixed income investments for interest income can help diversify the portfolio. There are different types of fixed-income assets that can be selected based on an investor’s profile. Investors can employ suitable strategies to generate passive income based on their objectives and risk tolerance.
