Five ways to earn income through investing

You have always relied on your salary or your primary income to meet your financial goals. Your investments over the years can help you generate a second income. So much so, that if you plan better, this could change your life.

Here are five ways:

1) Dividends: When you buy stocks, you are purchasing a portion of the company. Any growth in a company, whose stock you hold, will indirectly benefit you as an investor. This is because, the value of the stock will also increase. But that is not the only source of returns from shares. Listed companies distribute a portion of their profits to shareholders regularly as dividends. This can be either on quarterly, half-yearly or annual basis. Sometimes, after a company has extra cash reserves, it could even announce a surprise bonus dividend. As a result, it can be a source of regular income to investors. Moreover, they are not taxed.

2) Dog stocks: Usually, there is an increase in buying of companies paying high dividends around September, just before the distribution of the money. They are identified using the dividend-yield – calculated by dividing the dividend by the share price. However, such stocks must be chosen wisely as the dividend yield could be higher because of a fall in the stock price. This could be an indicator of market’s lack of confidence in the company and may be a red flag. As a result, it is better to opt for stocks with a consistently high dividend-yield. They are called dog stocks.

3) MF dividends: Many mutual funds also have an annual dividend-payout option. This may come handy in bear market conditions. However, MF dividends are not assured. Moreover, when a mutual fund announces a dividend of say Rs 2, its NAV will fall by the same amount the next day.

4) Systematic Withdrawal Plan: Many mutual funds also allow a Systematic Withdrawal Plan (SWP) option. Under this scheme, a fixed amount of MF units will be sold on a particular day every month or quarter. This is just the opposite of the Systematic Investment Plan (SIP). However, it is better to opt for this atleast a year after purchasing the funds to avoid any exit fees.

5) MF monthly income plans: Various mutual funds invest in both equity as well as fixed-income instruments like bonds and corporate debentures. There are also schemes which invest only in debt instruments. These funds are designed to provide regular source of income. These funds are less risky than equity schemes. However, they also have a lower capacity for capital appreciation.