Passive investment is an investment strategy that will increase the returns of existing investors. It is a method to increase the wealth by making alternative investments that will maximise the existing fund amount. Investment in the index fund is one of the most preferred passive investments. In this type of investment, the investors will try to maximise their returns by investing in long term or short term portfolios.
The secret of increasing returns on investment is by trading with minimal investment and allowing the market to multiply the returns on investment. Passive investment is an alternative source of income where the approach is the long term by buying and holding the investment. It has grown its importance as there is little effort to put in and good returns can be expected. It can be done through asset management and the investment portfolio strategy.
Why passive income?
There are many benefits of passive income apart from money being on hand. Passive income is a recurring income which takes little effort and needs some capital investment and market knowledge to start off. Once the passive income is set up and continues for over a period of time the investor will continue to make the investment and earn returns from the investment. Sometimes investments can be for a short period of time till the assets are sold out or projects get completed.
Passive investments strategy involves investment of your time, money and energy. It works on the principle that markets will rise in the future. The investors will earn with the anticipation of price rise in the future. If the investor is investing in the stock market then the markets are subject to volatility and they can affect the investment.
Features of Passive investment
- Passive investment has low cost on investment. There is no regular trading and this is the reason that the transaction costs or commission is lower.
- Investors can diversify their efficiently as index funds spread risk on different investment products
- Ability to diversify the portfolio. The option of Diversification reduces the risk on the investment and enables good returns on investment.
Click here to know Wrong ways of Investment Diversification
Advantages of Passive investment
Passive investment provides the option of diversification. Diversification of investments is the key for successful investors. Apart from diversification, below are other advantages.
Less fees– Passive investments is an alternative way of earning income. There is no agent appointed for selecting the stocks. The investor will make the decision of investing into the stock funds.
Simple and easy– it is easy to invest in stocks or groups of indices. When it is compared to dynamic strategy of investment it requires a lot of research and planning.
Transparent- The investments that you make are transparent. The investor will know the size of the portfolio and expected returns on the investment. The investor can track the ups and downs on the investments.
Click here to know how to Match your Investments with financial goals
Disadvantages of Passive investment
Passive investing is adhered to market risk. The stock’s performance is subject to the company and the market. There is a fall in the stock prices and the index funds are also subject to fluctuations. There is no flexibility with passive investment. The other disadvantages of passive investment include the following.
High risk– The passive investments are subject to specific funds. The investors get locked in the holdings. There is a predetermined set of investments which has almost no or little variance.
Low returns– The investments made into passive investments is low and as a result the returns are also less. The core investments get locked into tracking the market. Passive investments can give returns but they remain less compared to active investments.
Passive Investment Income
Passive income is generated with very little effort and sometimes no effort. A cash flow that is generated from the investment or the assets acquired is a passive income. In the UAE, you can make passive income from different sources and a couple of them have been discussed here.
Rental income– It is a wise decision for investors to consider the investment into the real estate business. The income on the rental property will be consistent with the changing market conditions. It is best to have the property investment in the area where the market value is very high. If the market value of the property is higher then the return on investment through rental income will also be fairly high.
Dividend income- Investment through stocks in Dubai Financial Market, Abu Dhabi Securities Exchange or any other international market where the cash flow is generated by the way of dividends. When the investor makes investments into high yielding stocks then the returns on the investments will also be very high.
Other forms of general money making investments can be through earning from hobbies, creating a youtube channel, selling online courses, making reviews, investment in gold, savings or fixed deposits accounts, mutual funds, Initial public offering in UAE, national bonds, royalty income from intellectual property, fixed income annuity plans, income from bonds or deposits.
Take away
With minimal investment, a passive investment can be a good source to earn higher returns and this is subject to market situations. There is no investment strategy that will fit for all. Have in depth knowledge about the market. Learn investment strategies and opt for passive investments to earn additional income apart from your active income. Investments are associated with risk and before you come for trading do proper research and have good knowledge of the market.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
