Introduction
Everyone dreams of earning money while they sleep — that’s what passive income is all about. But can mutual funds really help you achieve that? Let’s find out how mutual funds can generate steady income without constant market monitoring.
1. Understanding Passive Income
- Passive income refers to money earned with minimal ongoing effort.
- Common examples: rent, dividends, or interest income.
- In the context of mutual funds, this mainly comes from dividends, systematic withdrawals, or monthly income plans.
2. Dividend Payout Mutual Funds
- These funds distribute part of their profits as dividends to investors.
- Dividends can be a consistent source of cash flow, but they depend on fund performance.
- Important: After SEBI’s 2021 rule changes, dividends are taxable as per your income slab.
3. Systematic Withdrawal Plan (SWP)
- With an SWP, you can withdraw a fixed amount periodically (monthly or quarterly).
- Ideal for retirees or anyone seeking regular income.
- Advantage: You keep your investment intact while drawing income from returns.
4. Hybrid or Monthly Income Plans
- These funds invest in both equity and debt, aiming for moderate growth plus regular payouts.
- They’re less volatile than pure equity funds but offer better returns than fixed deposits over time.
5. Reinvesting Dividends for Compounding
- If you don’t need the income immediately, reinvest dividends to grow your wealth faster.
- Turning short-term income into long-term wealth creation.
6. Tax Implications
- Dividends: Taxed as per individual slab.
- SWP: Only the capital gains portion is taxed.
- Hybrid funds: Tax treatment depends on equity–debt ratio.
Conclusion
Mutual funds may not provide guaranteed monthly income like fixed deposits, but with smart planning — through dividend funds, SWPs, or hybrid schemes — they can become a reliable source of passive income over time. The key is choosing funds that align with your risk tolerance and financial goals.
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