How to Manage Personal Finance and Create Passive Income

There's nothing quite appealing as the idea of earning passive income. In essence, the idea revolves around generating revenue without active day-to-day involvement. As the popularity of passive income grows, it's critical to understand the best ways to capitalize on this financial phenomenon. Extracted from a discussion with Mr. Kiran Sha, a financial planner with over 14 years of experience, here are some key strategies:

Key Takeaways

1. Create an emergency corpus with liquid funds
2. Invest in hybrid funds for long-term growth
3. Diversify your investment portfolio with systematic investment plans (SIPs)

Generating Passive Income through Liquid and Hybrid Funds

One strategy endorsed by Kiran involves:

• Reserving 22.5 lakhs in a liquid fund as a buffer for situations such as covering one year's rent.
• Placing about 2.85 crores in a hybrid fund, which is a combination of debt and equity, for about 12 to 18 months.
• After the maturity term, you can engage in a systematic withdrawal plan (SWP) of about 8% per year from that fund.

In such a scenario, even as you consistently withdraw 8% every year for your needs, your corpus grows by about 4% annually. This happens because the fund generates about 10 - 11% over a longer period while you withdraw only 8%.

Considering Fractional Real Estate Investment

To diversify the portfolio, one can consider fractional real estate investment. It allows you to invest a minimum of 25 to 50 lakhs and can yield about 9 - 11% passive income annually. There is also an opportunity for capital appreciation.

Diversifying Portfolio using Systematic Investment Plan(SIP)

Kiran suggests further diversification by investing into large-cap, mid-cap, and small-cap, with an equal split of 33% each. Implementing a 15-20% step increase each year can compensate for a late start in the investment journey. With just a 12% return assumed each year, one can accumulate a significant amount of wealth within 7 to 10 years.

Tax Considerations and Foreign Choices

Remember that passive income is also subject to tax; thus, the net amount might reduce substantially after tax deductions. Careful tax planning is essential to maximize benefits from passive income.

Finally, for those considering moving abroad, it's crucial to understand the purchasing power parity (PPP) between India and the foreign country. A high earning in a foreign country may not necessarily translate into a significant saving due to lifestyle change and additional expenses of living abroad.

Conclusion

While a passive income approach may seem appealing, it's essential to remember that such strategies require a decent corpus to begin with. Moreover, personal finance is just that - personal. Therefore, financial strategy should be based on an individual's specific circumstances and financial goals.