Are Mutual Funds Passive Income?

Let’s face it. Most people would like to have a steady stream of money sent to their bank accounts without exchanging time and labor for the money. That stream of cash is called passive income, and mutual funds may be one way in which you can earn at least some passive income. 

Mutual funds can be a source of passive income because of the dividends and interest paid to investors, whether the investor opts for receiving a dividend check or reinvesting the dividends back into the fund. 

The rest of this article will explain a few topics related to this question in detail, including defining passive income, determining how mutual funds can be passive income, and other ways to earn passive income.

What Is Passive Income?

Passive income is money generated through either an upfront investment of money, time, or labor that produces a steady income without a constant need to replenish the initial investment of money, time, or labor.

The first example of passive income that most people provide is real estate rentals. The initial investment is the money with which you bought the property. You may also have to invest time and labor to get the property ready to rent and find tenants, but after that, the monthly rent check comes straight to your account without much, if any, effort on your part.

Owning rental property is a sweet deal, but not everyone can afford to purchase a property. However, many people can buy mutual funds, and the dividend paid on the mutual fund is considered passive income by everyone except the IRS, so make sure you know what type of fund you are investing in.

Investopedia explains that “In some cases, distributions are subject to your ordinary income tax rate, which is the highest rate. In other cases, you may be eligible to pay the lower capital gains tax rate. Other distributions may be completely tax-free.” As always, it is best to check with your tax adviser to determine your specific tax situation.

Are Mutual Funds the Best Way To Earn Passive Income?

Dividends earned from mutual fund investments are passive income, and there are two ways you gain this income.

• The first way is to have dividends paid to your bank account rather than reinvest the fund. This option is for people who need additional cash to fund their monthly expenses. It is considered passive income because there is no time commitment or physical exertion put forth to receive the money. It is simply paid to you when it is due.
• The second way to earn passive income with mutual funds is to reinvest your monthly dividends because as the portfolio grows, even if you are not receiving cash in your bank, you are still earning that money.

The challenge in using mutual funds as a source of passive income is that you have to use a broker to purchase mutual funds.

That’s because the goal of the mutual fund is to help you diversify your financial portfolio because they are considered a safer investment than stocks. Mutual funds allow you to ride out lows and often continue doing well when the stock market is high.

However, when considering investing in mutual funds for passive income, you want a higher return on the mutual fund investment, which means you will have to accept more volatility, defeating the intended purpose of mutual funds.

Some Better Options To Consider

Rather than investing in mutual funds, which come with complexities and risk, you can try other ways of making a passive income. Here are a few of them: 

• Design and sell information. Everyone is good at something. Consider your talent and then show other people how to develop that talent in themselves. You could write an ebook to sell on Amazon or create an entire course to sell on places like Udemy.
• Add REITs to your investment portfolio. An REIT is an acronym for Real Estate Investment Trust. Most trade on the Stock Exchange and have a good track record of providing competitive returns.
• Rent out your home short-term. You may have a long vacation planned or need to help a relative build a house or care for a loved one. If you will be gone for six months or more, rather than paying a house-sitter, consider renting your home for six months of passive income.
• Create a YouTube Channel. This passive income method can be time-consuming at first, and it takes a lot to build a following, but once you have your idea and create the following, sponsors will pay you to allow them to advertise on your channel.

Why Do You Need Passive Income?

Listed below are some of the top reasons for which you should consider generating passive income streams:

Passive Income Can Be a Security Net

Regardless of where you are in your career — just starting or heading towards retirement — finding ways to earn passive income is worthwhile, and as the pandemic of 2020 proved, a necessary venture.

However, for many people, the thought of passive income seems like a far reach. How many people actually have the capital to invest in rental property? There is no mistake that rental property is a good option for passive income.

Unfortunately, for many, owning rental property is out of reach. Therefore, many people believe passive income is unreachable given their particular set of circumstances.

For most people, though, this belief threatens financial security. Refer to the pandemic. Rental properties held tenants who could not pay the rent, but if you had other forms of passive income — mutual funds being one of many — your income stream may have decreased, but it would not have stopped completely. 

A Plan for Retirement

If you are over fifty, you may have a 401K or retirement pension provided by your employer. Many 401Ks are offered at a dollar-for-dollar match by the employer. Other employers also offered pension programs to take care of their employees after retirement.

Those days seem long gone as companies no longer invest in their employees through benefits like matching 401Ks. Very few have pension programs, so most likely, if you are younger than fifty, you likely do not have these options but are still interested in ways to earn passive income so that your standard of living does not have to change when you retire.

Freedom

Other people want passive income because they want to live life while they are young rather than actively work for a company in exchange for the money needed to fund the standard of living they desire, and mutual funds may be an excellent place to start. `

Three Must-Read Books on Passive Income

When trying to start a passive income venture, it is best to learn from someone who has had success. Following are some books from Amazon we like that can get you started.

• Affiliate Marketing Secrets Unlocked is more of a booklet. Still, it was published in 2021 in both ebook and print format, so it offers the most up-to-date information about affiliate marketing and how to make it part of your passive income stream.
• How to Generate Passive Income Online is an ebook with just 92 pages, and it is an excellent place to start gathering ideas for passive income strategies.
• Content Inc., Second Edition is available in both Kindle and hard copy format. The author, Joe Pulizzi, is an expert in content marketing, and he shares his ideas for creating a loyal audience and building content that keeps your audience coming back. You can then monetize the audience that you attract with your content. 

Conclusion

Earning passive income is not an idea that is too good to be true. It takes knowledge, patience, and an investment of time, money, labor, or a combination of all three. Mutual funds are certainly a way to earn passive income, but they are not the only way and may not even be the best way to accomplish your passive income goals.