Creating passive income is essential for reaching financial freedom. Fortunately, there are many types of passive income we can choose to invest in. Listed in this article are sources of Passive Income we can use to supplement our current earnings.

Bonds

Bonds are bank or government loans which have been cut down to smaller chunks. For example a loan for £100,000 can be split up into 100, £1000 bonds. Each bond is then sold to a stake holder, who then receives an income from the interest rate of the loan. This form of passive income is quite low risk compared to stocks. Bonds give a constant return at the interest yield you invested at. The main problem with bonds is that the income is fixed, whereas stocks have the ability to increase in value and may also provide a dividend pay-out.

Mutual fund/ unit trusts

Mutual funds or unit trust (UK) are professionally managed portfolios. Each mutual fund company may invest in different stocks and commodities. Bear in mind that mutual funds usually come with huge fees, for example you may have to pay an initial charge of 3-5% and there may even be annual performance fees attached. You can try to save yourself money by purchasing stocks in the mutual fund directly from the mutual fund company rather than from the stock market, through your stock broker. Vanguard is a good example of a mutual fund company. Some of these companies invest in index stocks (which mimic the trend of the stock market) or a large variety of other commodities or companies. The main benefit to this form of investing is leverage. Vast quantities of money (often billions) are pooled together from multitude of investors which can bring huge returns but adversely this can equal huge losses.

The main drawback with mutual funds is the fact you’re paying someone to risk your money for you whereas you can invest in the stock market yourself. Mutual funds can be a very lucrative form of passive income but yet are you willing to let someone else risk your money for you?

Royalties

Royalties can be generated from Books, music and movies. After you have published your thought, knowledge or talent in any of these formats, you will continue to get receive a cut from every single book, song or film sold. For example J.k Rowling will still be rolling in Harry Potter royalty money for the rest of her life. With the introduction of iTunes and ebooks it has become very accessible to generate an income from royalties.

Cash and Fixed Deposits

Cash and Fixed Deposits also generate passive income, since inflation rates are almost guaranteed to be higher than the savings rates, resulting in negative real returns for cash deposits. The only time when you would invest in cash is when all other asset classes are overvalued and waiting for an opportunity to enter the market.