Imagine a life where you are free from financial obligations, where money flows into your bank account without having to put in 8 to 9 hours of work. While all this sounds too good to be true, it's all possible with passive income. Let's find out more about the various ways to have passive income in Pakistan and how to have a secure future with steady cash inflows.

In a Nutshell

• How to Generate Passive Income in Pakistan?
• Investing in Stocks for Passive Income
• Benefits of Investing in Stocks
• Tips to Select the Right Stocks
• Investing in Mutual Funds For Passive Income
• Benefits of Investing in Mutual Funds
• Mutual Funds VS. Savings Accounts
• FAQs

What is Passive Income?

So, what really is passive income? In simple words, it’s a regular income which requires little or no maintenance. And the most amazing part is that it’s not reliant on you putting time into it on daily basis.

Passive income in Pakistan or anywhere else is generated through investments or assets that produce a steady stream of income. This means you can earn money while you're sleeping, travelling, or spending time with loved ones. It's a dream lifestyle for many, and it's not reserved for the super-rich, it could be you with proper planning, guidance, and learning about financial instruments.

How to Generate Passive Income in Pakistan?

Now that we know what passive income is, the big question is,” how to generate passive income in Pakistan”? While there are many ways to pave way for a passive income, two of the surefire ways are through stocks and mutual funds in Pakistan.

Mutual funds pool money from several investors and invest it in stocks, short-term debts and bonds. Investment in stocks in Pakistan is another way of generating passive income. With the right approach and strategy, you can create a consistent income stream that grows over time. We'll explore how you can use stocks and mutual funds in Pakistan to generate passive income, and the strategies you can use to maximize your earnings.

Given the economic condition of our country, everyone is on the lookout for ways to make some extra money, especially those who solely rely on active income.

If that’s your case, then you’ve come to the right place because in this article we will explore how you can generate passive income through stocks and mutual funds in Pakistan.

Investment in stocks is one of the most popular options for passive income in Pakistan

Investing in Stocks for Passive Income

Dividend Stocks

There are two types of stocks in which you can invest, dividend stocks and growth stocks. If you’re new to stocks, then you’ll find dividend stocks to be the simplest way of investing. All you have to do is purchase shares of a public company with good standing in the market as they generate profit, and you’ll be getting a portion of those earnings in the form of dividends.

These earnings are funnelled back or siphoned off to investors and then it’s up to you whether you want to reinvest it or cash it out. An important aspect to remember is that every dividend yield differs from company to company and they also fluctuate.

If you’re unsure about which dividend stock to pick to generate dividend income, we suggest you stick to the ones which have at least a 25-year track record of paying substantial dividends to investors.

Growth Stocks

Growth stocks in comparison are any share in the company which is expected to grow at a significant rate, higher than the average market growth. The growth stocks do not pay regular dividends because the issuers of these stocks are companies that want to reinvest any incurred earnings to accelerate their growth in the short term.

So, if you’re considering investing in growth stocks, you will make the passive income through capital gains where you will sell the shares after their prices rise. So, for a growth stock, you buy them cheap and sell when the prices go upward.

Why You Should Invest in Individual Stocks for Passive Income

Let’s see why individual stocks in Pakistan are becoming increasingly popular, and what advantages you’re likely to yield from them.

• The market has several stocks that pay dividends
• It requires little or no maintenance and you can literally make money while sleeping
• Another added advantage is that you don’t have to pay any management fees to own individual stocks, this means you get to keep the whole amount from the dividends
• You get complete control over where you want to invest your money but this means you’ll have to do your own research to decide which company is worth investing in
• Individual stocks also give you the freedom to invest in companies that reflect your values, for instance, companies which are socially responsible

Tips for Selecting Stocks to Generate Passive Income

Determine Your Goals:

The first step to selecting stocks is to determine your goals. This is what your profile will be based on. We know everyone wants to invest in stocks for money but the reasons can vary. So think about whether you want to preserve your wealth, create enough money to retire peacefully or if you want to save to buy a property.

Do Your Research

We can’t stress this one enough! Do your research extensively and try to keep up with the new market trends. Subscribe to financial blogs, they’ll help you in keeping up with the industry.

Find the Right Companies

Now on to the most crucial part, finding the right companies for you. There’s a lot that goes into selecting the right companies for your stock portfolio in Pakistan. Without understanding the fundamentals of the market, picking a stock is nothing short of a gamble.

You can also use a stocks screener to filter the stocks based on your preferred criteria. This way, you can pick any industry or sector. Screeners offer features such as dividend yield, and a market cap of companies.

Investing in Mutual Funds for Passive Income

As we explained at the very start of our article, a mutual fund is like a financial pool where you can invest in bonds, stocks, and other money market instruments. To open a mutual fund, you’ll need a professional manager who will allocate the fund’s assets to generate passive income in Pakistan.

There are countless mutual fund categories in Pakistan. Your mutual fund portfolio needs to match your investment objectives.

It is highly effective in generating passive income for individual investors. The investors get access to professionally managed bonds, portfolios of equities and other securities. And as you become a shareholder, you participate proportionally in any losses or gains from the fund.

Why Should you Invest in Mutual Funds in Pakistan?

One key advantage of investing in mutual funds in Pakistan is that it's diversified and divided into several different categories. There are several Shariah-compliant mutual funds as well offered by leading banks and financial institutions in the country. Before deciding to invest in a mutual fund to earn passive income, keep in mind the type of returns you expect.

Mutual funds are a good source of passive income for risk-averse individuals. Some mutual funds offer a lower risk of capital erosion as compared with stocks.

Note that mutual funds have expense ratios and they charge annual fees or commissions as agreed with your fund manager. These deductions can affect your overall returns.

Be financially healthy by investing your savings in the right stocks and mutual funds for passive income

Mutual Funds VS. Savings Accounts in a Bank

Mutual funds in Pakistan offer several advantages over savings accounts in a bank. Here are some reasons why mutual funds are a better option for you:

Higher Returns

Mutual funds offer higher returns than savings accounts. The interest rates on savings accounts are relatively low, whereas mutual funds invest in a diverse range of assets such as stocks and bonds, which has the potential to offer higher returns over time.

Diversification

Investing in mutual funds allows you to diversify your portfolio. Mutual funds invest in a variety of stocks and bonds, which helps to spread risk and minimise the impact of any one investment's performance on your overall portfolio. On the other hand, savings accounts offer no diversification as they simply hold your money and offer minimal returns after one fiscal year.

Professional Management

Mutual funds in Pakistan are managed by professional fund managers who have the expertise and resources to make informed investment decisions. These professionals constantly monitor the market and adjust the fund's investments accordingly to maximise returns. Savings accounts, on the other hand, do not provide any professional management.

Liquidity

Mutual funds offer higher liquidity than savings accounts. You can easily sell your mutual fund units and receive cash within a few days, while savings accounts may have withdrawal restrictions or penalties.

While savings accounts provide a safe and reliable option for storing your money it lacks the potential for growth and better returns. Stagnant money loses its value over time. Alternatively, mutual funds offer the potential for higher returns, diversification, professional management, and greater liquidity. However, it's important to remember that mutual funds also carry risks, and this is why you need to have a complete understanding of the Capital Market Fundamentals to make an informed decision and stay financially healthy.

FREQUENTLY ASKED QUESTIONS

Does Pakistan Stock Exchange have Shariah-compliant stocks?

Yes, PSX has several Shariah-compliant stocks that offer a good dividend yield. Some companies offer better growth opportunities for long-term investment. These stocks are listed under the KMIALLSHR Index on Pakistan Stock Exchange.

What are some of the best mutual funds in Pakistan for passive income?

There are different categories of mutual funds in Pakistan, each with its own benefits and downsides so it's not a one-size fits all scenario. You’ll need to figure out your investment goals, risk profile, capital amount and several other aspects before picking the right mutual fund to invest in Pakistan.

Start your road to financial freedom with passive income. Start with understanding how the capital market works to get an idea about the macroeconomic conditions, interest rates and their effects on your capital in both stocks and mutual funds.

Another benefit of passive income is that its the ultimate wealth creation tool for long-term consistent investment with good returns over time. It provides a safety net for you to take risks while creating financial stability.

With time as your fundamental knowledge about the capital market grows, you can further hone your skills and knowledge with Technical Analysis Masterclass, an in-depth course that covers all the nitty-gritty of trading in global financial markets.