Investment options for passive income

Introduction

Let’s first define what is the investment. Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.

In finance, the purpose of investing is to generate a return from the invested asset. The return may consist of a gain (profit) or a loss realized from the sale of a property or an investment, unrealized capital appreciation (or depreciation), or investment income such as dividends, interest, or rental income, or a combination of capital gain and income. The return may also include currency gains or losses due to changes in the foreign currency exchange rates.

This series is made mainly to highlight investment in start-ups and small businesses, so here we will compare the most common options of fund investing.

Expressions in the article

ROI: Return On Investment

Inflation: inflation is a general increase in the prices of goods and services in an economy

ETF: Exchange-Traded Fund

Venture Capital: capital invested in a project in which there is a substantial element of risk, typically a new or expanding business.

Passive Income: It is money that you earn without active involvement. In other words, it is income that is acquired automatically with minimal labour to earn or maintain

Now let’s explore some types of investment for passive income generation:

Gold and precious metals

Some people invest their savings by buying Commodity ETFs which is mainly about trading precious metals such as Gold and Silver through stock markets or there are others who prefer to buy these commodities in it’s physical form. The people usually invest in these assets to preserve the value of their savings or to get return on investment by buying these assets when it’s price is relatively low and selling it when it’s value increase.

This kind of investing is good for inflation hedge, and it is risk-free. It allows you to preserve the value of your savings. However, this type of investment generates no return if you used it for merely value preservation and if you decided to trade on it, it is not a type of investment to bring you passive income, it requires from you to follow up and calculate continuously when you should sell and buy assets. Besides, even if you decided to trade actively on these assets, the return on investment will be very low after all.

Stock ETFs

In this type of investment, you buy stock in a one or many companies listed in the stock market. Buying this stock means that you have bought an equity in the company. Which make you partner to this company in success and failure but (without decision making rights depending on other factors). This is a big topic to discuss but what concern us here is pros & cons of this option

The good thing about this option that it has a medium or high yield on investment if you are expert enough to be player in this field.

However, the disadvantage that it is very risky. You might lose your investments if you are not experienced stock trader. Besides, it needs from you a lot of work to make right decisions if you wanted to be active trader. If you decided to trade through experienced trader (Broker), you will need to pay commission for managing your investment. Even with trading through a broker, it will not be risk-free investment, however, the chances of successful investment will be higher.

Bond ETFs or Investment Certificates from Banks

In this type, you issue an investment certificate from the bank or trade Bond ETFs related companies listed in the stock market and in return you get a regular income.

The good thing about this kind of investment that it is risk-free. However, the disadvantage that it has no return on investment or at least has a very low return on investment because usually governments make it available and control the interest rate to collect fund from the people but, when the inflation strike, the actual income from investment becomes zero or brings very low level of ROI (Return on investment)

Real estate investment

In this type of investments, you buy a house or apartment. Most of the people get attracted to this type of investment because they believe that it is a good for financial value preservation, however, this is not actually true because value of real estate assets is volatile and depends a lot on the economic situation of the country where you are investing in.

The advantage of investing in this area is that you can get a regular income by renting your property, however, most of the time you will need to manage everything by yourself such as carefully selecting tenants, all legal issues and property maintenance. So, after all it is a time demanding job, it is not an investment that generate passive income.

Besides, buying a house in most cases needs a high capital, so if you have a little amount of money, you can’t simply invest by buying a house.

Land & Farm Investment

Investing by buying a farm or land is an attractive option. Owning a farm or land and renting it is a quite good investment. It generates a regular income and don’t require from the landlord to invest a lot of time and effort such as in the case with real estate units. Land also is a good asset for value preservation, it has low volatility compared to real estate.

Although, it is safer compared to ETFs and Real estate units, the return on investment is not so high after all. Besides, in most cases, buying a land suitable for farming or any other business type, requires from you to have a high capital. So, it will not be a practical option for investors from middle-income class.

Investment in start-ups

Here we come to the core point of this investment series. Investing in start-ups is an entirely different type of investment, it is some type of investment which is highly risky but insanely profitable. It is profitable to the level, where you will find enormous number of firms racing to hunt the promising start-ups for investing. A quick search on LinkedIn, you can find that there is around 48,000 Venture Capital firm worldwide! For investing in start-ups. Why do you think that there is this level of interest?

There is this rule of thumb that says the level of risk is proportional to the level of earn and this is entirely true when it comes to investing in a start-up. By the time of writing this article, the valuation of company like Uber is bypassing the threshold of 55 billion dollars. Start-ups can be valued in range between 0.5 – 10 million at early stage (seed or pre-seed round of fund raising – we will come to this point later in another article).

But how much is it risky to invest in a start-up? The answer for this question is not one.

It depends on multiple factors. As an example, if you are not experienced investor and you invest by your own, it will be very risky. As a non-expert investor (non-accredited), you can invest in start-ups through a crowdfunding platform; In particular, equity-based crowdfunding platform. However, if you are an expert investor (accredited investor) or you are investing through an expert investor, then the investment will be far less risky.

Usually, those expert investors know very well the targeted sector for their investment, and they undergo with the start-up through a process called “due diligence” to make sure that the chance of success is high. Those investors typically don’t invest in a start-up before making sure that the start-up team validated the idea and made some progress with it.

Through Funders Hub, you can invest in promising start-ups. The biggest advantage that you can invest through venture capital firm or Group of Experts when you use Funders Hub. This will drastically mitigate your risk and grant you a mind-peace as you will not need to explore and study investment opportunities. You have also the option to invest in your own if you want.

Investment in small business

Investing in a small business is an attractive option for many people because the ROI rate of this investment is higher than other types such as ETFs, metals, real estate, or land. It is also easy and affordable; easy because it generates a passive income and affordable because you don’t need a high capital to start investing in a small business. In this investment model, you fund the business owner with some amount of money, in return you become a partner and has an equity in this business according to your agreement with the main owner of the business.

Despite the mentioned advantages, investing in small business has number of serious challenges. As an example, small business typically is not a tec-company so your ability to track all financial transactions is so limited, meaning that you need to be very selective when you choose to invest in some small business which run by someone else. You must know the business owner very well and you are trusting him a lot. Another issue, you must know for sure that the business owner is experienced enough to start a business in this specific field otherwise investing will be very risky.

Through Funders Hub, you can invest in promising small businesses, we are taking all measures that ensure transparency such as investing in businesses where all money transactions are done digitally

Key takeaways

There are different categories of investment that could help unaccredited investors to invest their savings in a good way and generate passive income. It is almost the dream of everyone to be financial independent, however, very few are really aware how to invest their savings in the most effective way that result in a substantial transition for their financial state. We talked through this article about pros and cons of different types of investments. What you should take away that

• You should diversify your investment portfolio to mitigate the risk.
• The profitable investment is always a long-term investment
• You should always consider the trade-off between risk and level of profitability
• There is always a proportional relation between the level of ROI and the risk related to this investment. So, the success-key if you are unexperienced investor, is to know where you should invest. You can invest in highly profitable businesses, but our advice is to do that through an accredited (experienced) investor.
• Through Funders Hub, you can have a seamless experience of investing in start-ups or small businesses. Through our digital platform you will be able to track continuously your investment and how is it changing with time