All of us want financial freedom. But very few initiate to achieve it. Most of us remain engaged in any particular occupation. Particularly the job holders do so. Now, to achieve financial freedom doesn’t rely solely on 9-to-5 jobs and 401k plans.
Ace investor Warren Buffet advised retail investors to create at least 3 sources of income for financial inclusion. The US have witnessed historically high unemployment rates and volatility in the stock market, so you need to create assets that will yield income in the future rather than liabilities that will make a hole in your wallet.
When you want to figure out by investing in which assets you will create a passive income source that will reduce stress post-retirement, here are the list of income producing assets where you can invest.
Income Producing Assets #1. Bonds
When we need a lump sum amount of money, most of us take a bank loan by mortgaging our homes or car, or any other valuables. Just like that, to meet the financial need the companies, federal government, municipal authorities borrow money from the market by issuing bonds.
By issuing the bonds, the federal government, municipalities, or companies promise the bondholders to pay back that investment plus interest after a specific period of time. In exchange, your town promises to pay you back that investment, plus interest, over a specified period of time. In the US three types of bonds exist namely Treasury Bonds i.e. T-bonds, Municipal Bonds, and Corporate Bonds.
How do they work?
Corporate Bonds or securities work on the same principle as stocks work. There is a debt market for debt securities and bonds like the stock market. The prices of the securities or bonds go up and down due to supply and demand.
The interest rate of banks affects widely on bonds and securities. If the interest rate of banks increases then the demand for the bonds or securities decreases. It is because, if the bank gives a satisfactory return why people will invest in debt securities that carry risk.
In the US, people consider banks and post offices to be the safest place to park their money in respect of liquidity and assured return of interest. And if the interest rate decreases then the investors head to debt securities in search of better returns than FDs. The demand for bonds increases and gives better returns to holders owing to the increase in demand for bonds or securities.
How a retail investor can buy Bonds?
Contrary to Stocks where you can invest as low as $10, the minimum amount required to invest in bonds is as low as $100. A retail investor can buy bonds in 3 ways,
- Via a broker from other investors who are willing to sell.
- Through an Exchange Traded Fund where ETF typically buys bonds from different companies for the short, medium, and long term of any specific industry or sector.
- Directly from the Federal government via their website that allows investors to buy bonds directly without any charges to a broker or middleman.
Income Producing Assets #2. Stock Market,
Historically Stock Market has delivered better returns across all asset classes when you stay invested for a long term horizon. When you are a long term investor, volatility, or a sharp correction is the golden opportunity to grab the shares at an attractive valuation.
Novice investors are quite confused while starting investment in the stock market. So, before investing in stocks let’s discuss the 5 questions that may arise in the investor’s mind.
What is the right time to start investing?
Well, the best time to invest in the stock market was yesterday, and the worst day to start investing is Tomorrow. The perfect day to start investing in the stock market can be Today.
How much amount should I invest?
Since you can start investing with as low as $100, you should start investing with $100. You are free to invest in the stock market even $10000, but invest only surplus fund that you don’t require for the upcoming 10 years.
By which route should I start investing?
If you are able to analyze the balance sheet and profit and loss account of any company then you must go with the direct equity. In case you don’t have any idea about the balance sheet and P&L account then stick with the equity mutual funds. They have generated a 12-15% CAGR when invested for the long run.
How can I diversify a stock portfolio?
When you are investing by opening a Demat account, diversify in quality stocks across various sectors namely Consumer Durables, Technology, Pharmaceuticals, Paints, and Pigments, etc.
Income Producing Assets #3. Anuites,
An annuity is a financial product offered by various insurance companies. An annuity is a contract between an individual and the insurance company itself after you make a lump-sum payment or a series of payments to the insurance company. The main object of the annuity is to secure the financial needs of an individual i.e. a steady payment after retirement.
You can opt for an annuity plan either by paying a lump sum payment at once or continue contribution for a specific period of time by paying regular premiums. The duration of annuity may be for any specific period of time i.e. just to say for the upcoming 20 years or until the death. If you choose until death then you may get lower amounts. Let’s make it clear with the following example.
Suppose you invest Rs. 10 Lakh at once and you opt for a period of 20 years in order to get a regular source of income for that fixed time. Then the insurer will start paying in accordance with the time horizon as opted for by the individual.
Income Producing Assets #4. Peer to Peer Lending,
P2P lending platforms connect the borrowers who are looking for funds to the investors who are looking for better returns by lending the capital to the borrowers. The Lending platforms set the rates of interest-based on the creditworthiness of any individual, terms, and conditions for transactions.
How Peer to peer lending works?
Suppose that you require $100 as a loan. Now after registering in a P2P platform, you will find many lenders. So, you contact lender Tom and ask for a loan of $ 100. If you get there the whole amount you do not need to contact any other lender. But if you do not get the desired amount from the lender Tom, then you need to contact the other lenders to get the desired loan of $100.
Let’s make it clear with the help of the following example. Suppose, in this case, the lender Max agrees to lend you $20 only at an interest rate of 12%, so, you get $20. But still, you are short of $80 from your desired loan amount of $100. So, you contact several lenders namely Bill, Cate, William, Andy, Melinda, Robert, etc. Then, among them, William, Andy, Melinda, and Robert agree to give you a loan of $20 each. In this way, you can make use of the P2P platform to get a loan with ease.
Owing to the lucrative returns more than the fixed deposits and mutual funds, peer to peer lending is gaining popularity day by day. It is because the investors i.e. lenders enjoy an interest return as high as 36% per annum. And the borrowers enjoy a less interest rate of 12% in comparison to banks who offer business loans @16-17% interest rate. But in order to get started, you need to consider the following 5 points.
Although in accordance with the Government’s norms any individual is capped with a maximum amount of $ 10 lakh across the entire P2P lending platform, you should invest that huge amount at once. In order to gain double-digit growth, do not invest up to the maximum limit. One more thing is to consider if you are earning an interest income of $5000 by lending $50,000 then you should put the principal back and invest the rest amount in any other asset class to minimize the risk.
You need to diversify
You should diversify i.e. divide your money among various parties. Thus you can mitigate the risk of the default. It is advised if you can bear some risk you can put $2500 – $3000 per month to earn up to 36% return annually. You should include at least 10 borrowers in your portfolio if your investment amount is $10000. Try to control your greed. You may get new borrowers that will offer more interest rate. But more interest rate carries more risk too. You should evaluate the risk in order to gain a satisfactory return.
You may use the formula of 3:6:1. If you have $1000, you may invest $300 in low risk, $600 in moderate risk, and $100 in high-risk profiles. You should be sure about the income to debt ratio, CIBIL Score, etc. of the borrower before selecting the party.
Always check the borrower’s profile
Select your borrowers and divide them into various categories like very Low risk, Low risk, Moderate risk, High risk, and very High-risk parties. You should evaluate a borrower’s profile and creditworthiness before lending him.
Usually, peer to peer companies offer an interest rate between 12.5% and 35% annually on the basis of the level of risk. Many peer to peer platforms give a score out of 100, which determines the risk profile of the borrowers.
Usually, a score between 50 and 60 points is considered as a high-risk profile while more than 70 points are considered as a low-risk profile which will attract a lower interest rate. The score is determined by past repayment behavior, creditworthiness, loan history in the past, ability to repay, etc.
Always check the defaulter rate
Defaulter rate reveals the ratio of defaulters in any p2p platform. You should check carefully whether any peer to peer lending platform shows its defaulter rate explicitly on its website. You should choose the older companies to get started.
Income Producing Assets #5. Real Estate Investment Trusts [REITs],
REITs manage commercial, residential properties, and earn rents by leasing or renting the properties to shopping malls, health centers, or individuals. Here are the 4 types of REITs where a retail investor can invest for better capital appreciation over the long run.
When you are investing in REITs that are investing in shopping malls, take a glance at the financial health at current and what is the outlook in the near future. Since Retail REITs make money by renting properties by charging tenants if retailers are experiencing a drop in sales it’s likely they will delay the payments and in the worst case, they default. Look for those REITs where they rent to grocery and home improvement stores.
These REITs make revenue by investing in multi-family rental apartment buildings. When home affordability is low, these REITs make money by charging rent to the tenants in the major cities namely New York, San Antonio, Houston, and Los Angeles. To pick the best residential REITs take a glance at the population and unemployment rate.
When there is a flow of people in cities mentioned above owing to the rise in jobs, the economy tends to rise and thereby increase the demand of the apartment. Since the demand for apartments tends to rise, Residential REITs deliver better returns in the long run.
With the increase of age, most Americans will witness higher healthcare costs. Healthcare REITs invest in hospitals, medical centers, to generate revenue. Since the demand for healthcare services tends to rise, Healthcare REITs likely to deliver better returns in the long run.
These types of REITs invest in office buildings that enable them to get rental income from the tenants that have signed a lease. When investing in office REITs you should consider not only the unemployment rate but also how much it will cost to acquire a property. As an intelligent investor, you should invest in New York, than to invest in Seattle.
Income Producing Assets #6. Precious Metals,
When you are looking for to diversify your investment portfolio across various asset classes, the precious metal is a good fit. The Gold and Silver have a track record of sweet returns over the long term. They also have of a risk-averse investor’s portfolio. Here are the 3 metals that require your attention when you are about to start investing in the precious metal segment.
Gold – Since Gold doesn’t rust or corrode, this is a must-have ingredient for various industrial appliances and electronics, a base for jewelry. The Gold price is determined by the market. The market is totally dependent on the supply and demand.
Silver – Unlike Gold that is less volatile, Silver witnesses price volatility when compared to gold. The price of Silver depends on its role in various industries. When the demand for silver is on rising owing to the demand for photographic films, then prices tend to rise.
Platinum – Platinum is a rare metal. It fetches higher prices than Gold. Apart from thatplatinum is used in the automotive industry, so higher demand leads to auto lift the price of platinum to higher levels.
Income Producing Assets #7. Website or Blog,
This is sometimes called ‘Online Real Estate’. You can build an authority blog, and eventually sell your online property to online market platforms namely Flippa, Empire Flippers.
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