What are mutual funds?

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.

Why do people buy mutual funds?
What types of mutual funds are there?
What are the benefits and risks of mutual funds?
How to buy and sell mutual funds
Understanding fees
Avoiding fraud
Additional information

Why do people buy mutual funds?

Mutual funds are a popular choice among investors because they generally offer the following features:

• Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.
• Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.
• Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.
• Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.

What types of mutual funds are there?

Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds. Each type has different features, risks, and rewards.

• Money market funds have relatively low risks. By law, they can invest only in certain high-quality, short-term investments issued by U.S. corporations, and federal, state and local governments.
• Bond funds have higher risks than money market funds because they typically aim to produce higher returns. Because there are many different types of bonds, the risks and rewards of bond funds can vary dramatically.
• Stock funds invest in corporate stocks. Not all stock funds are the same. Some examples are:
  • Growth funds focus on stocks that may not pay a regular dividend but have potential for above-average financial gains.
  • Income funds invest in stocks that pay regular dividends.
  • Index funds track a particular market index such as the Standard & Poor’s Index.
  • Sector funds specialize in a particular industry segment.
• Target date funds hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts according to the fund’s strategy. Target date funds, sometimes known as lifecycle funds, are designed for individuals with particular retirement dates in mind.

What are the benefits and risks of mutual funds?

Mutual funds offer professional investment management and potential diversification. They also offer three ways to earn money:

• Dividend Payments. A fund may earn income from dividends on stock or interest on bonds. The fund then pays the shareholders nearly all the income, less expenses.
• Capital Gains Distributions. The price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, the fund distributes these capital gains, minus any capital losses, to investors.
• Increased NAV. If the market value of a fund’s portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The higher NAV reflects the higher value of your investment.

All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.

A fund’s past performance is not as important as you might think because past performance does not predict future returns. But past performance can tell you how volatile or stable a fund has been over a period of time. The more volatile the fund, the higher the investment risk.

How to buy and sell mutual funds

Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The price that investors pay for the mutual fund is the fund’s per share net asset value plus any fees charged at the time of purchase, such as sales loads.

Mutual fund shares are “redeemable,” meaning investors can sell the shares back to the fund at any time. The fund usually must send you the payment within seven days.

Before buying shares in a mutual fund, read the prospectus carefully. The prospectus contains information about the mutual fund’s investment objectives, risks, performance, and expenses. See How to Read a Mutual Fund Prospectus Part 1, Part 2, and Part 3 to learn more about key information in a prospectus.

Understanding fees

As with any business, running a mutual fund involves costs. Funds pass along these costs to investors by charging fees and expenses. Fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you.

Even small differences in fees can mean large differences in returns over time. For example, if you invested $10, in a fund with a 10% annual return, and annual operating expenses of %, after 20 years you would have roughly $49, If you invested in a fund with the same performance and expenses of %, after 20 years you would end up with $60,

It takes only minutes to use a mutual fund cost calculator to compute how the costs of different mutual funds add up over time and eat into your returns. See the Mutual Fund Glossary for types of fees.

Avoiding fraud

By law, each mutual fund is required to file a prospectus and regular shareholder reports with the SEC. Before you invest, be sure to read the prospectus and the required shareholder reports. Additionally, the investment portfolios of mutual funds are managed by separate entities know as “investment advisers” that are registered with the SEC. Always check that the investment adviser is registered before investing.

Additional Information

Mutual Funds and ETFs – A Guide for Investors
Closed-End Funds
Index Funds
Smart Beta, Quant Funds and Other Non-Traditional Index Funds
Interval Funds
Mutual Fund Proxy Voting Records and Policies
Mutual Fund Investing: Look at More Than a Fund's Past Performance

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

*Automatically prefills an additional screen to the FundPicks selection criteria. Results are limited to FundPicks and funds with an SEC yield greater than 1%.

SEC yield: A standard yield calculation developed by the Securities and Exchange Commission for bond funds. The yield is calculated by dividing the net investment income per share earned during the day period by the maximum offering price per share on the last day of the period. The yield figure reflects the dividends and interest earned during the day period, after the deduction of the fund's expenses. It is sometimes referred to as "SEC Day Yield" or "standardized yield".

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal. High yield/non-investment grade bonds involve greater price volatility and risk of default than investment grade bonds. The securities of smaller, less well-known companies can be more volatile than those of larger companies.

Growth stocks can perform differently from the market as a whole and other types of stocks and can be more volatile than other types of stocks.

Value stocks can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets.

Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets.

If you&#;re looking to achieve financial freedom before a traditional retirement age (60+), you must build passive income. This post will highlight the best passive income investments in our current low interest rate environment.

Passive income is the holy grail of personal finance. If you have enough passive income to cover your desired lifestyle, then you are free at last! You can say and do whatever you want. Too many people fail to live their truth due to a lack of passive income.

However, the only way to generate useable passive income is by building a taxable investment portfolio, which includes investing in real estate, alternative investments, and more.

Maxing out your (k), IRA, and Roth IRA are great moves. Unfortunately, they can&#;t generate passive income to live on until after you turn , in most cases. When it comes to achieving financial freedom, the hope is that we achieve it as soon as possible given our time is limited.

Why I Focused On Building Passive Income

After about the 30^th day in a row of working 12+ hour days and eating rubber chicken dinners at our company&#;s free cafeteria, I decided I had enough. Working in investment banking was wearing me out. I needed to generate more passive income to break free.

There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. Thus, I started focusing on generating passive income in

However, it wasn&#;t until the financial crisis where I became obsessed with building passive income. The previous financial crisis made working in finance no fun. I&#;m sure many people are feeling the same way about their occupations during the global pandemic as well.

It wasn&#;t until when I generated enough passive income (~$80,) to break free from work. And it wasn&#;t until when I was able to generate enough passive income to take care of a family ($,).

Today, I estimate my wife and I will generate roughly $, in passive income (see the chart at the end with a breakdown of various passive income sources). will hopefully be the third year in a row of generating over $, in passive income so we can remain stay at home parents in expensive San Francisco.

We&#;ve discussed how to get started building passive income for financial freedom before. Now I&#;d like to rank the various passive income streams based on risk, return, feasibility, liquidity, activity, and taxes.

I&#;m updating my passive income rankings for given so much has changed since my original passive income rankings came out in A key difference to my best passive income investments ranking is the inclusion of taxes as new ranking variable. After all, tax treatment can significantly affect returns.

The best passive income rankings are born from my own real-life experiences attempting to generate multiple types of passive income sources over the past 22 years.

Best Passive Income Investments Starts With Saving

By far the most important reason to save is so you can have enough money to do what you want, when you want, without anybody telling you what to do. Financial freedom is the best!

Sounds nice right? If only there was a formula or a chart like the k by Age chart which gives people guidance on how much to save and for how long in order to reach financial freedom.

Unfortunately, saving money is only the first step in building passive income. Figuring out how to properly invest your savings is even more important.

If you can max out your k or max out your IRA and then save an additional 20%+ of your after-tax, after-retirement contribution, good things really start to happen. The ultimate goal I recommend is for everyone to shoot to save 50% of their after-tax income or more.

It is your taxable retirement portfolio that is going to allow you to retire early and do whatever you want. Because it is your taxable retirement portfolio that spits out passive retirement income. You can&#;t touch your (k) and IRA before the age of without a 10% penalty.

The pandemic has shown us that if we WANT to save more, we can. Before the pandemic began, the U.S. personal saving rate hovered around 5% &#; 7%. Now it looks like the average saving rate may consistently be above 10%.

Let&#;s take a look at the best passive income investments for and beyond.

Ranking The Best Passive Income Investments

Below are the eight best passive income investments to consider. Each passive income stream is ranked based on Risk, Return, Feasibility, Liquidity, Activity, and Taxes. Each criterion has a score between The higher the score, the better.

• A Risk score of 10 means no risk. A Risk Score of 1 means there is extreme risk.

• A Return score of 1 means the returns are horrible compared to the risk-free rate. A Return Score of 10 means you have the highest potential of getting the highest return relative to all other investments.

• A Feasibility score of 10 means everybody can do it. A Feasibility score of 1 means that there are high requirements to be able to invest in such an asset.

• A Liquidity score of 1 means the investment is very difficult to withdraw your money or sell without a penalty or a long period of time. A Liquidity score of 10 means you can access your funds instantly without penalty.

• An Activity score of 10 means you can kick back and do nothing to earn income. An Activity score of 1 means you&#;ve got to manage your investment all day long like working a day job.

• A Tax score of 1 means the investment is taxed at the highest possible rate and there&#;s nothing you can do about it. A Tax score of 10 means the investment is generating the lowest tax liability possible or you can do things to lower the tax liability.

To make the ranking as realistic as possible, every score is relative to each other. Further, the return criteria are based on trying to generate $10, a year in passive income.

Best Passive Income Investment Chart

Let&#;s look at my overall Best Passive Income Investments ranking chart. It has recently been updated to account for the ever-changing economic environment. Interest rates will likely stay low for a while, which makes generating meaningful passive income harder.

Compared to the previous best passive income investments chart, Fixed Income / Bonds moved down from 3rd best to 5th best due to rising rates and low yields. While Physical Real Estate moved up from 5th best to 3rd best partly due to rising inflation. Inflation is likely going to stay elevated for due to a surge in energy prices and commodities.

Dividend (stock) investing is still the ranked the best passive income investment. However, it may not be the best for you given its higher volatility and lower relative yields. I&#;m expecting an uninspiring in the stock market, but continued strong runs for real estate. Therefore, real estate is moving up the rankings.

Best Passive Investment Rank #8: Peer-to-Peer Lending (P2P)

The least best passive income investment is P2P lending. P2P lending started in San Francisco with Lending Club and Prosper in mid The idea of peer-to-peer lending is to disintermediate banks and help denied borrowers get loans at potentially lower rates compared to the rates of larger financial institutions. What was once a very nascent industry has now grown into a regulated multi-billion dollar business.

With a diversified portfolio of or more notes, the leading P2P lenders claim investors can make an annual return between 5% &#; 7%. The returns used to be higher, but the increased supply of money has brought returns down.

The biggest problem with P2P lending is people not paying investors back e.g. borrowers default on their loans. There&#;s something that just doesn&#;t sit right when people break their contract obligations.

Over time, the P2P industry has seen its returns shrink due to higher competition and more regulation. As a result, I believe making money through P2P investing is one of the worst ways to generate passive income today. Although Lending Club no longer offers P2P investing, you can still invest in individual loans with Prosper or use their automated investing feature.

Risk: 4, Return: 2, Feasibility: 8, Liquidity: 4, Activity: 7, Taxes: 5. Total Score: 30

Best Passive Investment Rank #7: Private Equity Or Debt Investing

Private equity investing can be a tremendous source of capital appreciation with the right investments. If you find the next Google, the returns will blow every single other passive income investment out of the water. But of course, finding the next Google is a tough task since most private companies fail. Further, the best investment opportunities always go to the most connected investors.

The most liquid types of private equity investments are those investing in equity or credit hedge funds, real estate funds, and private company funds. Private debt investments include venture capital and real estate funds as well. There are usually year lockup periods, so the Liquidity score is low. These funds should at least provide for some semi-regular passive income distributions.

The least liquid type of private investment is when you invest directly into a private company. You could be locked up forever and receive zero dividends or distributions.

Access to private investments are usually restricted to accredited investors ($K income per individual or $1 million net worth excluding primary residence), which is why the Feasibility Score is only a 2.

But the Activity Score is a 10, because you can&#;t do anything even if you wanted to. You&#;re investing for the long term. The Risk and Return score greatly depends on your investing acumen and access.

Gaining $10, a year in private equity investing is difficult to quantify unless you are investing in a real estate or fixed income fund. Such funds generally target % annual returns, which equates to a need for $83, &#; $, in capital.

Risk: 6, Return: 8, Feasibility: 3, Liquidity: 3, Activity: 10, Taxes: 6. Total Score: 36

Best Passive Investment Rank #6: Certificate of Deposit (CD) / Money Market

There was a time when CDs or money market accounts would produce a respectable 4%+ yield. Nowadays, you’ll be lucky to find a year CD that provides anything above %. The great thing about CDs is that there are no income or net worth minimums to invest.

Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, CD and money market accounts are FDIC insured for up to $, per individual and $, per joint account.

Now you can typically only get an online money market account paying % (as of December ) because the Fed slashed rates to 0%. In comparison, the year Treasury bond yield is hovering around %. The problem with owning the year bond is that you have to own the bond for 10 years to guarantee you&#;ll get the current yield.

It takes a tremendous amount of capital to generate any meaningful amount of passive income with savings now. To generate $10, a year in passive income at % requires $2,, in capital! At least you know your money is safe, which is great during bear markets.

The huge drop in interest rates is why it&#;s prudent to lower your safe withdrawal rate in retirement and/or build a bigger net worth before you retire. It takes a tremendous amount more in capital to generate the same amount of risk-adjusted income today.

Interest rates are ticking back up now that the economy is recovering. The Fed also stated it will raise interest rates three times in Therefore, savers should benefit, but investors may see a more volatile period.

Below is a chart that showed how much more capital you needed to generate $50, a year in income due to a collapse in interest rates in The graph has come down as interest rates have risen in But it still makes the point about how investors need a lot more capital in a low interest rate environment.

Take Advantage Of A Drop In Interest Rates

The main thing savvy investors can do to take advantage of a huge drop in interest rates is to refinance debt or take on debt and invest in higher return investments.

At the very least, homeowners should be refinancing their mortgages. Check out Credible, my favorite mortgage lending marketplace where lenders compete for your business. It&#;s free to get a real mortgage rate quote.

The best mortgage value is refinancing or getting a year fixed mortgage rate, followed by a year fixed. The average year fixed mortgage rate is lower than the average 5/1 ARM rate. This is an anomaly worth taking advantage of.

Risk: 10 (no risk), Return: 1 (the worst return), Feasibility: 10 (anybody can open up a savings account). Liquidity: 6 (savings are easily accessible, but not CDs without a penalty). Activity: 10 (you don&#;t have to do anything to earn passive income. Taxes: 5 (interest income is taxed as normal income). Total Score: 42

Best Passive Investment Rank #5: Fixed Income (Bonds)

As interest rates have been going down over the past 30 years, bond prices have continued to go up. With the year yield (risk-free rate) at roughly %, we&#;re in an interesting situation.

The year yield was at only % in August I believe long-term interest rates can stay low for a long time. Just look at Japanese interest rates, which are negative (inflation is higher than the nominal interest rate).

Bonds provide a terrific defensive allocation to an investment portfolio, especially during times of uncertainty like during the coronavirus pandemic. If you hold a government bond until maturity, you will get all your coupon payments and principal back. But just like stocks, there are plenty of different types of bond investments to choose from.

Anybody can buy a bond ETF such as IEF ( Year Treasury), MUB (muni bond fund), or a fixed income fund like PTTRX (Pimco Total Return Fund). You can also buy individual corporate or municipal bonds.

Municipal bonds are especially enticing for higher-income earners who face a high marginal tax rate. You can also directly buy Treasury bonds through your online brokerage platform.

Main Concern With Bonds

The main concern for bonds is that the Fed Funds rate will likely go up given inflation is picking up. If interest rates do go higher, bonds will decline in value, all else being equal. In fact, the markets are now forecasting three Fed rate hikes by

That said, so long as you hold the bond to maturity, you should get your initial principal back along with all the coupon payments if you are buying a highly rated bond e.g. AA. Further, the Fed has clearly stated it will keep the Fed Funds rate at 0% for the next couple of years.

Bonds are a great investment to help decrease volatility in your portfolio. I hope everybody at least takes advantage of lower interest rates and refinances their mortgage.

Refinancing your mortgage or any debt is one of the easiest ways to generate new passive income. I refinanced my mortgage to a 7/1 ARM at % for minimal fees with Credible.

As a result, I boosted my cash flow by $ a month, which is like boosting passive income! Unfortunately, mortgage rates are ticking back up in due to higher inflation expectations. But they are still very low by historical standards. Best to refinance now before rates go up even further.

Risk: 6, Return: 2, Feasibility: 10, Liquidity: 7. Activity: Taxes: 8. Total Score: 43

Best Passive Income Rank #4: Creating Your Own Products

If you’re a creative person, you might be able to produce a product that’s able to generate a steady flow of passive income for years to come. At the extreme, Michael Jackson makes more dead than alive. This is due to the royalties his estate makes from all the songs he produced in his career. Since Michael&#;s death, his estate has made over $ billion according to Forbes.

Of course, it’s unlikely any one of us will replicate the genius of Michael Jackson, but you could produce your own eBook, e-course, award-winning photo, or song to create your own slice of passive income.

Example Of A Product

In , I wrote a page eBook about severance package negotiations. Today, the book is in its 5th edition for and is pages. It regularly sells about ~50 copies a month at $87 &#; $97 each without much ongoing maintenance.

Another way to think about how profitable creating a product can be is to look at the amount of capital it would take to generate the same about of earnings. For example, to replicate the ~$50, a year in passive income I can get from the book, I would need to invest $1,, in an asset that generates a 4% yield. To earn $10, a year in passive income would therefore need roughly $, in capital.

Who would have thought a book about engineering your layoff could regularly generate so much revenue? We’re so busy with our jobs that our childhood creativity sadly vanishes over time. Now that millions of jobs are at risk, the book has become a better seller.

Another Example: Royalty Payments

On June 28, , I will launch a traditionally published book with Portfolio / Penguin Random House, entitled, Buy This, Not That: Spend Your Way To Wealth And Freedom. The book took two years to write and has been reviewed and revised 12 times by three professional editors.

Once the book sells enough copies to cover my book advance, I will make a 15% royalty based off each hardcover sale. To pre-order the book and guarantee delivery on the launch date, please click the link and order. I believe the book will provide at least X more value than the cost of the book.

Leverage the internet to create, connect, and sell. The startup costs are low and it&#;s easier than ever to launch your own site. The only main risks are lost time and a wounded ego.

Here&#;s my step-by-step guide on how to start your own profitable site in under 30 minutes. You want to build an online business that can&#;t get shut down.

Below is a real income statement of a personal finance blogger who started his website on the side while working.

If you are a constant daydreamer, creating your own product is one of the best ways to go. The margins can be extremely high once your product is produced. The only thing you need to do is regularly update the product over time. If you have a great product, the upside is enormous.

Risk: 8, Return: 8, Feasibility: 8, Liquidity: 6, Activity: 7, Taxes: 7. Total Score: 44

Best Passive Investment Rank #3: Physical Real Estate

Real estate is my favorite asset class to build wealth for the average person because it&#;s easy to understand, provides shelter, is a tangible asset, doesn&#;t lose instant value like stocks overnight, and generates income. When I was in my 20s and 30s, I thought owning rental properties was the best passive income investment.

The only bad thing about owning physical real estate is that it ranks poorly on the Activity variable due to tenants and maintenance issues. You can get lucky with great tenants who are self-sufficient and never bother you. Or you can be stuck with tenants who never pay on time and throw house-damaging parties.

Maintenance issues can be an ongoing headache without proper preventative maintenance. For example, your roof could leak during the next Bomb Cyclone. Or your water heater could burst and flood your basement. Both have happened to me before!

Owning your primary residence means you are neutral the real estate market. Renting means you are short the real estate market. Only after buying two or more properties are you actually long real estate. This is why everybody should own their primary residence as soon as they know they want to stay put for years. Inflation is too powerful a force to combat.

In order to generate $10, in Net Operating Profit After Tax (NOPAT) through a rental property, you must own a $50, property with an unheard of 20% net rental yield, a $, property with a rare 10% net rental yield, or a more realistic $, property with a 5% net rental yield.

Generating High Rental Income Is Tough On The Coasts

In expensive cities like San Francisco and New York City, net rental yields (cap rates) can fall as low as %. This is a sign that there is a lot of liquidity buying property mainly for appreciation. Income generation is second. This is a riskier proposition than buying property based on rental income.

In inexpensive cities, such as those in the Midwest and South, net rental yields can easily be in the range of 7% &#; 10%, although appreciation may be slower.

I&#;m bullish on the heartland of America real estate and have been actively buying commercial real estate there through real estate crowdfunding and specialty REITs, which we will discuss more below.

Real Estate Has Great Tax Benefits

The tax benefits of owning physical real estate are very attractive. The first $, in gains is tax-free per individual. If you&#;re married and own the property together, then you can receive $, in tax-free gains upon sale.

Then there&#;s the ability to exchange a property you own for another property via a Exchange so you don&#;t have to pay any capital gains taxes.

If you own rental property, you can take non-cash amortization expenses to reduce any rental income taxes. Owning property over the long term is one of the most proven ways to build wealth and generate passive income for the average American.

I believe there is an attractive opportunity to buy real estate in and beyond due to low mortgage rates, a rotation out of stocks, and the desire for more income and less volatility. I&#;m personally looking to buy another single-family home to rent out.

Further, the value of rental income has gone way up since interest rates have gone way down. Therefore, I think buying rental properties in this low interest rate environment is good because rental property valuations have not appreciated as much as the cash flow they generate.

Risk: 8, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 6, Taxes:  Total Score: 45

Best Passive Investment Rank #2: Real Estate Crowdfunding, REITs, Real Estate ETFs

Owning physical real estate has been my key source for achieving financial freedom. My rental properties generate about $, after expenses a year, or roughly a third of my overall passive income streams. However, now that I&#;m older and have two young children, I really want to minimize the time I deal with maintenance issues and tenants.

Therefore, I&#;ve been investing more of my capital in real estate crowdfunding, REITs, and real estate ETFs. Real estate crowdfunding enables individuals to buy a percentage of a commercial real estate project that was once only available to ultra-high net worth individuals or institutional investors.

Owning individual physical real estate is great, but it&#;s like going all-in on one asset in a particular location with leverage. If the market goes down, your concentrated investment could lose big time if you are forced to sell. Many did during the last financial crisis.

My favorite real estate crowdfunding platform for accredited investors is CrowdStreet. They are focused on individual real estate projects in hour cities. Valuations tend to be lower and net rental yields tend to be higher in places like Memphis, Charleston, etc. If you like to pick your own deals and want to build your own select real estate fund, CrowdStreet is a great choice.

If you are not an accredited investor and like to invest in diversified funds, you can invest in private eREITs through Fundrise. Fundrise is the leader in this more diversified style of real estate and has been around since For the average investor, a diversified eREIT is probably the best way to go. Fundrise does the work for you so you don&#;t have to.

Unlike other passive investments on the list, with real estate crowdfunding you at least have a physical asset as collateral. Both platforms are free to sign up and explore.

% Passive Real Estate Income Is So Nice

For those of you who dislike dealing with tenants and maintenance issues, investing in real estate crowdfunding is wonderful.

In mid, I sold my San Francisco rental property for 30X annual gross rent. I reinvested $, of the proceeds in a real estate crowdfunding portfolio. The goal was to take advantage of lower valuations across the country with much higher net rental yields. Not having to deal with maintenance issues and tenant problems has been wonderful.

Coastal city real estate has become too expensive. I expect people and capital to naturally flow towards lower-cost areas of the country, especially post-pandemic. The future of work is remote. Take advantage of a multi-decade demographic shift inland.

Further, the performance of Fundrise&#;s eREITs has been relatively steady during stock market downturns. Therefore, if there is another crash, Fundrise eREITs should outperform. Real estate is defensive because it becomes more affordable as mortgage rates decline. Investors want real assets that provide shelter and income.

To be able to invest in real estate, but % passively is a great combination. You can invest in publicly-traded REITs as well for real estate exposure. However, as we saw in the violent March stock market downturn, REITs performed even worse.

Risk: 7, Return: 7, Feasibility: 10, Liquidity: 6, Activity: 10, Taxes: 7. Total Score: 47

The Best Passive Investment Rank #1: Dividend Investing

The best passive income investment is dividend-paying stocks. Dividend and value stocks are making a comeback after underperforming growth stocks during the pandemic. Value is back!

The “Dividend Aristocrats” are a list of blue-chip companies in the S&P that have demonstrated a consistent increase in dividend payouts over the years. Names such as McDonald&#;s, P&G, Sherwin-Williams, Caterpillar, Chevron, Coca-Cola, and Sysco Corpare considered some of the best blue-chip dividend stocks. But there are some dogs like AT&T.

Let’s say a company earns $1 a share and pays out 75 cents in the form of a dividend. That’s a 75% dividend payout ratio. Let’s say the next year the company earns $2 a share and pays out $1 in the form of dividends. Although the dividend payout ratio declines to 50%, due to the company wanting to spend more CAPEX on expansion, at least the absolute dividend amount increases.

Dividend stocks tend to be more mature companies that are past their high growth stage. As a result, they are relatively less volatile from a stock context. Utilities, telecoms, and financial sectors tend to make up the majority of dividend-paying companies. In , the S&P dividend yield is about %, which roughly equals the year bond yield.

Tech, Internet, and biotech, on the other hand, tend not to pay any dividends. They are growth stocks that reinvest most of their retained earnings back into their company for further growth. But growth stocks can easily lose investors tremendous value over a short period of time.

Pay Attention To Dividend Yields

To achieve $10, in annual passive income with a ~% S&P dividend yield would require $, Instead, you could invest only $, into AT&T stock given its % estimated dividend yield.

It all depends on your risk tolerance. I give dividend investing a 5 on Return because dividend interest rates are relatively low. Further, the volatility is now relatively high.

One of the easiest ways to get exposure to dividend stocks is to buy ETFs like DVY, VYM, and NOBL or index funds. Alternatively, you can DIY and use Personal Capital&#;s free financial tools to manage your wealth. The key is to invest consistently over time.

In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while being mostly invested in index funds. Dividend index investing is great because it is passive and liquid.

However, given dividend rates are low and volatility is high after a 12+-year bull market, the Return score is lower than in the past.

Risk: 6, Return: 5, Feasibility: 10, Liquidity: 9, Activity: 10, Taxes: 8. Total Score: 48

Best Passive Income Investments Review

Based on my new six-factor model for ranking the best passive income investments, the top five passive income investments are:

• Dividend Stocks
• Real Estate Crowdfunding, REITs, and Real Estate ETFs
• Creating Your Own Products
• Owning Rental Properties

If you can stomach occassional volatility, investing in dividend stocks is truly one of the best passive income investments over the long run. If you want less volatility with likely higher yields, invest in real estate crowdfunding, rental properties, and fixed income instead.

There was a time when I loved owning physical real estate the best. It was my favorite way to generate a steady stream of rental income. However, once I became a dad in , I no longer had as much time or energy to manage properties.

Real estate crowdfunding through platforms like Fundrise and CrowdStreet are good solutions for my real estate investment capital. % passive income is wonderful. I really like the combination of owning a hard asset that generates income. It&#;s a more stable way to grow wealth.

For those who are the creative types, starting your own website like this one and creating products online feels extremely rewarding. Some say making $1, on your own is like making $5, or $10, at a job.

However, blogging would score a 1 in the Activity Score since these posts don&#;t write themselves. Instead, you really want to create products like a book or a course to sell passively.

Finally, owning rental properties is becoming more attractive given how low interest rates have fallen. The value of rental income has increased so much that I&#;m looking to buy another physical rental property in

I&#;m bullish on the housing market for the next several years. As a result, I want to own as many rental properties as possible to benefit from rising rents and rising asset values.

Best Passive Income Investments Table

Once again, here are the best passive income investments. All eight passive income investments are appropriate ways for generating income to fund your lifestyle. The right ones depend on your personal preference, understanding of the investments, creativity, and interests.

Build More Passive Income Today

Enthusiasm for work is strongest when you are young and have very little money. After four years of high school, followed by another four years of college, work sounds like an exciting adventure! But after a while, your job can begin to beat you down.

Perhaps a coworker purposefully tries to make your life miserable because they resent your success. Maybe you get passed over for a promotion and a raise because you weren’t vocal enough about your abilities. Maybe you mistakenly thought you worked in a meritocracy. Whatever the case may be, you will eventually tire.

This is why it is important to take action while you still have the energy. With interest rates at rock bottom levels, building passive income will take a lot of effort and patience. Start now!

My Current Passive Income Investments

Below are my latest passive income streams that I&#;ve been building since Our passive income allows both my wife and I to be stay-at-home parents to two children. Our goal is to consistently generate $, in passive income and relocate to Hawaii for kindergarten by

As you can see from our passive income chart, roughly half of our passive income comes from real estate. Real estate is my favorite asset class to build wealth because it is relatively stable, generates income, and provides utility.

With economies opening up, I&#;m actively looking for hospitality real estate deals on CrowdStreet. CrowdStreet focuses on real estate opportunities in hour cities where valuations are lower and cap rates are higher. In addition, CrowdStreet has launched a build-to-rent fund to take advantage of the strong rental market.

Saving early and often is no sacrifice at all. Instead, the biggest sacrifice is living a life on someone else&#;s terms due to a lack of funds. Keep building the best passive income investments so you can one day be free.

Remember, if the amount of money you&#;re saving and investing doesn&#;t hurt, you&#;re not saving and investing enough. At the end of the day, nobody cares more about your money than you.

Now that you know the best passive income investments, it&#;s time to get cracking! Your future self will thank you.

Join 50,+ others and sign up for the free Financial Samurai newsletter. I&#;ve been writing about helping people achieve financial independence since Everything is written based off of firsthand experience. The Best Passive Income Investments is a www.oldyorkcellars.com original post. I have invested in all products mentioned for years.

We have seen demand for real assets grow dramatically in recent years, and we expect it will advance further as investors better understand the positive attributes of the asset class. Real assets offer the opportunity for diversification, inflation hedging and competitive total return potential. Real assets may also serve as a nontraditional source of income, a feature that investors frequently overlook.

What are real assets?

Broadly, real assets provide the framework and resources to facilitate everyday activity in the world economy. While numerous types of investments could be considered real assets, our definition includes:

• Real estate, including real estate investment trusts (REITs). Land and commercial properties including apartments, offices, warehouses, malls, etc.
• Infrastructure. Assets and networks used to transport, store and distribute goods, energy, people and information, such as toll roads, pipelines, airports and cellphone towers.
• Commodities. Basic goods such as oil, natural gas, precious metals, gold, corn and soybeans.

Unlike conventional stocks and bonds, the value of listed real asset investments comes from the physical nature of their underlying assets. This direct link to hard assets means real assets often store long-term value better than more traditional investments. Their intrinsic value may also increase due to higher utilization, greater demand or scarcity of supply.

The inherent characteristics of each real asset can vary, but they have several features in common.

Diversification benefits

Real assets have historically exhibited a lower correlation to a wide variety of investment alternatives, as well as other real assets. The performance drivers for real assets are fundamentally diverse from other types of securities. By expanding into asset classes with lower correlations, investors may potentially benefit from greater diversification.

Inflation hedging ability

Real assets have historically exhibited greater ability to hedge inflation than the broader equity and fixed income markets. Real assets have generally offered stronger returns during periods when inflation is rising.

In general, inflation increases as economic activity accelerates. In such an environment, commodity prices tend to rise in conjunction with inflation, as demand for goods increases with gains in consumption and building activity. Infrastructure and real estate also tend to have a positive correlation with inflation. When the prices for goods and labor costs increase, the replacement costs for these types of assets also increase. Additionally, many infrastructure assets have a direct tie to inflation measures such as the Consumer Price Index (CPI) in their contracts or concessions.

Real estate companies often structure leases with rent escalators that increase the rent over the life of the lease. In both cases, these structures are used to grow cash flows in an attempt to account for the potential effects of inflation.

Competitive total return potential

Global real estate and infrastructure investments have outpaced most other equity groups, including U.S. stocks and non-U.S. stocks, since

In addition, infrastructure has also offered a higher return with similar or less risk. And while global real estate has demonstrated more risk than broader non-U.S. equities, it has provided more return per unit of risk than the broader set.

Overall, infrastructure and global real estate equities have provided competitive risk-adjusted returns compared to U.S. equities and stronger risk-adjusted returns than non-U.S. equities.

Commodity returns since are low, as the asset class has been in a bear market that has persisted since the financial crisis in part due to supply and demand imbalances.

Nontraditional source of income

We believe real asset investments that offer a stable yield supported by contractual cash flows are especially attractive. These investments have assets that tend to be monopolistic, providing a strong and consistent income stream usually derived from their fee-for-use nature.

Infrastructure and real estate exemplify these types of income-producing real assets. These companies commonly own or operate location-specific hard assets that garner a fee for use through long-term contracts, concessions or leases. Commodities rely solely on capital appreciation and offer no income component. Infrastructure and real estate have the potential to produce attractive yields compared to other commonly held investments.

These alternative income sources may also prove particularly advantageous for investors in low interest rate environments where more traditional yield options are anchored by lower rates, much like we’ve seen globally for the past several years.

Moreover, these steady income streams may help cushion total returns in times of volatility, potentially providing for added downside risk management.

Emphasizing the most mature companies within infrastructure and real estate with fewer growth expectations allows for stable cash flow, and may result in a less volatile return stream.

Consider income producing real assets

Historically, income producing real assets such as infrastructure and real estate have supplied competitive total return and positive inflation hedging effects, with lower correlations to more traditional stocks and bonds. These asset classes have also provided convincing yields, helping investors diversify their income sources. Additional benefits to investors include enhanced total returns and cushioned performance during volatile periods. For these reasons, we feel income-producing assets should be an important part of a balanced portfolio.

About the author

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on www.oldyorkcellars.com Please note, it is not possible to invest directly in an index.

A word on risk
All investments carry a certain degree of risk, including possible loss principal and there is no assurance that an investment will provide positive performance over any period of time. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Concentration in infrastructure-related securities involves sector risk and concentration risk, particularly greater exposure to adverse economic, regulatory, political, legal, liquidity, and tax risks associated with MLPs and REITS. Foreign investments involve additional risks including currency fluctuations and economic and political instability. These risks are magnified in emerging markets. Common stocks are subject to market risk or the risk of decline. Small- and mid-cap stocks are subject to greater price volatility. The use of derivatives involves substantial financial risks and transaction costs. A potential investment in other investment companies means shareholders bear their proportionate share of expenses and indirectly, the expenses of other investment companies. Additionally, infrastructure-related entities may be subject to regulation by various governmental authorities and may also be affected by governmental regulation of rates charged to customers, service interruption and/or legal challenges due to environmental, operational or other mishaps and the imposition of special tariffs and changes in tax laws, regulatory policies and accounting standards.

Nuveen provides investment advisory solutions through its investment specialists.

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If you&#;re looking to achieve financial freedom before a traditional retirement age (60+), you must build passive income. This post will highlight the best passive income investments in our current low interest rate environment.

Passive income is the holy grail of personal finance. If you have enough passive income to cover your desired lifestyle, then you are free at last! You can say and do whatever you want. Too many people fail to live their truth due to a lack of passive income.

However, the only way to generate useable passive income is by building a taxable investment portfolio, which includes investing in real estate, alternative investments, and more.

Maxing out your (k), IRA, and Roth IRA are great moves. Unfortunately, they can&#;t generate passive income to live on until after you turn , in most cases. When it comes to achieving financial freedom, the hope is that we achieve it as soon as possible given our time is limited.

Why I Focused On Building Passive Income

After about the 30^th day in a row of working 12+ hour days and eating rubber chicken dinners at our company&#;s free cafeteria, I decided I had enough. Working in investment banking was wearing me out. I needed to generate more passive income to break free.

There was no way I could last for more than five years working in a pressure cooker environment like Wall Street. Thus, I started focusing on generating passive income in

However, it wasn&#;t until the financial crisis where I became obsessed with building passive income. The previous financial crisis made working in finance no fun. I&#;m sure many people are feeling the same way about their occupations during the global pandemic as well.

It wasn&#;t until when I generated enough passive income (~$80,) to break free from work. And it wasn&#;t until when I was able to generate enough passive income to take care of a family ($,).

Today, I estimate my wife and I will generate roughly $, in passive income (see the chart at the end with a breakdown of various passive income sources). will hopefully be the third year in a row of generating over $, in passive income so we can remain stay at home parents in expensive San Francisco.

We&#;ve discussed how to get started building passive income for financial freedom before. Now I&#;d like to rank the various passive income streams based on risk, return, feasibility, liquidity, activity, and taxes.

I&#;m updating my passive income rankings for given so much has changed since my original passive income rankings came out in A key difference to my best passive income investments ranking is the inclusion of taxes as new ranking variable. After all, tax treatment can significantly affect returns.

The best passive income rankings are born from my own real-life experiences attempting to generate multiple types of passive income sources over the past 22 years.

Best Passive Income Investments Starts With Saving

By far the most important reason to save is so you can have enough money to do what you want, when you want, without anybody telling you what to do. Financial freedom is the best!

Sounds nice right? If only there was a formula or a chart like the k by Age chart which gives people guidance on how much to save and for how long in order to reach financial freedom.

Unfortunately, saving money is only the first step in building passive income. Figuring out how to properly invest your savings is even more important.

If you can max out your k or max out your IRA and then save an additional 20%+ of your after-tax, after-retirement contribution, good things really start to happen. The ultimate goal I recommend is for everyone to shoot to save 50% of their after-tax income or more.

It is your taxable retirement portfolio that is going to allow you to retire early and do whatever you want. Because it is your taxable retirement portfolio that spits out passive retirement income. You can&#;t touch your (k) and IRA before the age of without a 10% penalty.

The pandemic has shown us that if we WANT to save more, we can. Before the pandemic began, the U.S. personal saving rate hovered around 5% &#; 7%. Now it looks like the average saving rate may consistently be above 10%.

Let&#;s take a look at the best passive income investments for and beyond.

Ranking The Best Passive Income Investments

Below are the eight best passive income investments to consider. Each passive income stream is ranked based on Risk, Return, Feasibility, Liquidity, Activity, and Taxes. Each criterion has a score between The higher the score, the better.

• A Risk score of 10 means no risk. A Risk Score of 1 means there is extreme risk.

• A Return score of 1 means the returns are horrible compared to the risk-free rate. A Return Score of 10 means you have the highest potential of getting the highest return relative to all other investments.

• A Feasibility score of 10 means everybody can do it. A Feasibility score of 1 means that there are high requirements to be able to invest in such an asset.

• A Liquidity score of 1 means the investment is very difficult to withdraw your money or sell without a penalty or a long period of time. A Liquidity score of 10 means you can access your funds instantly without penalty.

• An Activity score of 10 means you can kick back and do nothing to earn income. An Activity score of 1 means you&#;ve got to manage your investment all day long like working a day job.

• A Tax score of 1 means the investment is taxed at the highest possible rate and there&#;s nothing you can do about it. A Tax score of 10 means the investment is generating the lowest tax liability possible or you can do things to lower the tax liability.

To make the ranking as realistic as possible, every score is relative to each other. Further, the return criteria are based on trying to generate $10, a year in passive income.

Best Passive Income Investment Chart

Let&#;s look at my overall Best Passive Income Investments ranking chart. It has recently been updated to account for the ever-changing economic environment. Interest rates will likely stay low for a while, which makes generating meaningful passive income harder.

Compared to the previous best passive income investments chart, Fixed Income / Bonds moved down from 3rd best to 5th best due to rising rates and low yields. While Physical Real Estate moved up from 5th best to 3rd best partly due to rising inflation. Inflation is likely going to stay elevated for due to a surge in energy prices and commodities.

Dividend (stock) investing is still the ranked the best passive income investment. However, it may not be the best for you given its higher volatility and lower relative yields. I&#;m expecting an uninspiring in the stock market, but continued strong runs for real estate. Therefore, real estate is moving up the rankings.

Best Passive Investment Rank #8: Peer-to-Peer Lending (P2P)

The least best passive income investment is P2P lending. P2P lending started in San Francisco with Lending Club and Prosper in mid The idea of peer-to-peer lending is to disintermediate banks and help denied borrowers get loans at potentially lower rates compared to the rates of larger financial institutions. What was once a very nascent industry has now grown into a regulated multi-billion dollar business.

With a diversified portfolio of or more notes, the leading P2P lenders claim investors can make an annual return between 5% &#; 7%. The returns used to be higher, but the increased supply of money has brought returns down.

The biggest problem with P2P lending is people not paying investors back e.g. borrowers default on their loans. There&#;s something that just doesn&#;t sit right when people break their contract obligations.

Over time, the P2P industry has seen its returns shrink due to higher competition and more regulation. As a result, I believe making money through P2P investing is one of the worst ways to generate passive income today. Although Lending Club no longer offers P2P investing, you can still invest in individual loans with Prosper or use their automated investing feature.

Risk: 4, Return: 2, Feasibility: 8, Liquidity: 4, Activity: 7, Taxes: 5. Total Score: 30

Best Passive Investment Rank #7: Private Equity Or Debt Investing

Private equity investing can be a tremendous source of capital appreciation with the right investments. If you find the next Google, the returns will blow every single other passive income investment out of the water. But of course, finding the next Google is a tough task since most private companies fail. Further, the best investment opportunities always go to the most connected investors.

The most liquid types of private equity investments are those investing in equity or credit hedge funds, real estate funds, and private company funds. Private debt investments include venture capital and real estate funds as well. There are usually year lockup periods, so the Liquidity score is low. These funds should at least provide for some semi-regular passive income distributions.

The least liquid type of private investment is when you invest directly into a private company. You could be locked up forever and receive zero dividends or distributions.

Access to private investments are usually restricted to accredited investors ($K income per individual or $1 million net worth excluding primary residence), which is why the Feasibility Score is only a 2.

But the Activity Score is a 10, because you can&#;t do anything even if you wanted to. You&#;re investing for the long term. The Risk and Return score greatly depends on your investing acumen and access.

Gaining $10, a year in private equity investing is difficult to quantify unless you are investing in a real estate or fixed income fund. Such funds generally target % annual returns, which equates to a need for $83, &#; $, in capital.

Risk: 6, Return: 8, Feasibility: 3, Liquidity: 3, Activity: 10, Taxes: 6. Total Score: 36

Best Passive Investment Rank #6: Certificate of Deposit (CD) / Money Market

There was a time when CDs or money market accounts would produce a respectable 4%+ yield. Nowadays, you’ll be lucky to find a year CD that provides anything above %. The great thing about CDs is that there are no income or net worth minimums to invest.

Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, CD and money market accounts are FDIC insured for up to $, per individual and $, per joint account.

Now you can typically only get an online money market account paying % (as of December ) because the Fed slashed rates to 0%. In comparison, the year Treasury bond yield is hovering around %. The problem with owning the year bond is that you have to own the bond for 10 years to guarantee you&#;ll get the current yield.

It takes a tremendous amount of capital to generate any meaningful amount of passive income with savings now. To generate $10, a year in passive income at % requires $2,, in capital! At least you know your money is safe, which is great during bear markets.

The huge drop in interest rates is why it&#;s prudent to lower your safe withdrawal rate in retirement and/or build a bigger net worth before you retire. It takes a tremendous amount more in capital to generate the same amount of risk-adjusted income today.

Interest rates are ticking back up now that the economy is recovering. The Fed also stated it will raise interest rates three times in Therefore, savers should benefit, but investors may see a more volatile period.

Below is a chart that showed how much more capital you needed to generate $50, a year in income due to a collapse in interest rates in The graph has come down as interest rates have risen in But it still makes the point about how investors need a lot more capital in a low interest rate environment.

Take Advantage Of A Drop In Interest Rates

The main thing savvy investors can do to take advantage of a huge drop in interest rates is to refinance debt or take on debt and invest in higher return investments.

At the very least, homeowners should be refinancing their mortgages. Check out Credible, my favorite mortgage lending marketplace where lenders compete for your business. It&#;s free to get a real mortgage rate quote.

The best mortgage value is refinancing or getting a year fixed mortgage rate, followed by a year fixed. The average year fixed mortgage rate is lower than the average 5/1 ARM rate. This is an anomaly worth taking advantage of.

Risk: 10 (no risk), Return: 1 (the worst return), Feasibility: 10 (anybody can open up a savings account). Liquidity: 6 (savings are easily accessible, but not CDs without a penalty). Activity: 10 (you don&#;t have to do anything to earn passive income. Taxes: 5 (interest income is taxed as normal income). Total Score: 42

Best Passive Investment Rank #5: Fixed Income (Bonds)

As interest rates have been going down over the past 30 years, bond prices have continued to go up. With the year yield (risk-free rate) at roughly %, we&#;re in an interesting situation.

The year yield was at only % in August I believe long-term interest rates can stay low for a long time. Just look at Japanese interest rates, which are negative (inflation is higher than the nominal interest rate).

Bonds provide a terrific defensive allocation to an investment portfolio, especially during times of uncertainty like during the coronavirus pandemic. If you hold a government bond until maturity, you will get all your coupon payments and principal back. But just like stocks, there are plenty of different types of bond investments to choose from.

Anybody can buy a bond ETF such as IEF ( Year Treasury), MUB (muni bond fund), or a fixed income fund like PTTRX (Pimco Total Return Fund). You can also buy individual corporate or municipal bonds.

Municipal bonds are especially enticing for higher-income earners who face a high marginal tax rate. You can also directly buy Treasury bonds through your online brokerage platform.

Main Concern With Bonds

The main concern for bonds is that the Fed Funds rate will likely go up given inflation is picking up. If interest rates do go higher, bonds will decline in value, all else being equal. In fact, the markets are now forecasting three Fed rate hikes by

That said, so long as you hold the bond to maturity, you should get your initial principal back along with all the coupon payments if you are buying a highly rated bond e.g. AA. Further, the Fed has clearly stated it will keep the Fed Funds rate at 0% for the next couple of years.

Bonds are a great investment to help decrease volatility in your portfolio. I hope everybody at least takes advantage of lower interest rates and refinances their mortgage.

Refinancing your mortgage or any debt is one of the easiest ways to generate new passive income. I refinanced my mortgage to a 7/1 ARM at % for minimal fees with Credible.

As a result, I boosted my cash flow by $ a month, which is like boosting passive income! Unfortunately, mortgage rates are ticking back up in due to higher inflation expectations. But they are still very low by historical standards. Best to refinance now before rates go up even further.

Risk: 6, Return: 2, Feasibility: 10, Liquidity: 7. Activity: Taxes: 8. Total Score: 43

Best Passive Income Rank #4: Creating Your Own Products

If you’re a creative person, you might be able to produce a product that’s able to generate a steady flow of passive income for years to come. At the extreme, Michael Jackson makes more dead than alive. This is due to the royalties his estate makes from all the songs he produced in his career. Since Michael&#;s death, his estate has made over $ billion according to Forbes.

Of course, it’s unlikely any one of us will replicate the genius of Michael Jackson, but you could produce your own eBook, e-course, award-winning photo, or song to create your own slice of passive income.

Example Of A Product

In , I wrote a page eBook about severance package negotiations. Today, the book is in its 5th edition for and is pages. It regularly sells about ~50 copies a month at $87 &#; $97 each without much ongoing maintenance.

Another way to think about how profitable creating a product can be is to look at the amount of capital it would take to generate the same about of earnings. For example, to replicate the ~$50, a year in passive income I can get from the book, I would need to invest $1,, in an asset that generates a 4% yield. To earn $10, a year in passive income would therefore need roughly $, in capital.

Who would have thought a book about engineering your layoff could regularly generate so much revenue? We’re so busy with our jobs that our childhood creativity sadly vanishes over time. Now that millions of jobs are at risk, the book has become a better seller.

Another Example: Royalty Payments

On June 28, , I will launch a traditionally published book with Portfolio / Penguin Random House, entitled, Buy This, Not That: Spend Your Way To Wealth And Freedom. The book took two years to write and has been reviewed and revised 12 times by three professional editors.

Once the book sells enough copies to cover my book advance, I will make a 15% royalty based off each hardcover sale. To pre-order the book and guarantee delivery on the launch date, please click the link and order. I believe the book will provide at least X more value than the cost of the book.

Leverage the internet to create, connect, and sell. The startup costs are low and it&#;s easier than ever to launch your own site. The only main risks are lost time and a wounded ego.

Here&#;s my step-by-step guide on how to start your own profitable site in under 30 minutes. You want to build an online business that can&#;t get shut down.

Below is a real income statement of a personal finance blogger who started his website on the side while working.

If you are a constant daydreamer, creating your own product is one of the best ways to go. The margins can be extremely high once your product is produced. The only thing you need to do is regularly update the product over time. If you have a great product, the upside is enormous.

Risk: 8, Return: 8, Feasibility: 8, Liquidity: 6, Activity: 7, Taxes: 7. Total Score: 44

Best Passive Investment Rank #3: Physical Real Estate

Real estate is my favorite asset class to build wealth for the average person because it&#;s easy to understand, provides shelter, is a tangible asset, doesn&#;t lose instant value like stocks overnight, and generates income. When I was in my 20s and 30s, I thought owning rental properties was the best passive income investment.

The only bad thing about owning physical real estate is that it ranks poorly on the Activity variable due to tenants and maintenance issues. You can get lucky with great tenants who are self-sufficient and never bother you. Or you can be stuck with tenants who never pay on time and throw house-damaging parties.

Maintenance issues can be an ongoing headache without proper preventative maintenance. For example, your roof could leak during the next Bomb Cyclone. Or your water heater could burst and flood your basement. Both have happened to me before!

Owning your primary residence means you are neutral the real estate market. Renting means you are short the real estate market. Only after buying two or more properties are you actually long real estate. This is why everybody should own their primary residence as soon as they know they want to stay put for years. Inflation is too powerful a force to combat.

In order to generate $10, in Net Operating Profit After Tax (NOPAT) through a rental property, you must own a $50, property with an unheard of 20% net rental yield, a $, property with a rare 10% net rental yield, or a more realistic $, property with a 5% net rental yield.

Generating High Rental Income Is Tough On The Coasts

In expensive cities like San Francisco and New York City, net rental yields (cap rates) can fall as low as %. This is a sign that there is a lot of liquidity buying property mainly for appreciation. Income generation is second. This is a riskier proposition than buying property based on rental income.

In inexpensive cities, such as those in the Midwest and South, net rental yields can easily be in the range of 7% &#; 10%, although appreciation may be slower.

I&#;m bullish on the heartland of America real estate and have been actively buying commercial real estate there through real estate crowdfunding and specialty REITs, which we will discuss more below.

Real Estate Has Great Tax Benefits

The tax benefits of owning physical real estate are very attractive. The first $, in gains is tax-free per individual. If you&#;re married and own the property together, then you can receive $, in tax-free gains upon sale.

Then there&#;s the ability to exchange a property you own for another property via a Exchange so you don&#;t have to pay any capital gains taxes.

If you own rental property, you can take non-cash amortization expenses to reduce any rental income taxes. Owning property over the long term is one of the most proven ways to build wealth and generate passive income for the average American.

I believe there is an attractive opportunity to buy real estate in and beyond due to low mortgage rates, a rotation out of stocks, and the desire for more income and less volatility. I&#;m personally looking to buy another single-family home to rent out.

Further, the value of rental income has gone way up since interest rates have gone way down. Therefore, I think buying rental properties in this low interest rate environment is good because rental property valuations have not appreciated as much as the cash flow they generate.

Risk: 8, Return: 8, Feasibility: 7, Liquidity: 6, Activity: 6, Taxes:  Total Score: 45

Best Passive Investment Rank #2: Real Estate Crowdfunding, REITs, Real Estate ETFs

Owning physical real estate has been my key source for achieving financial freedom. My rental properties generate about $, after expenses a year, or roughly a third of my overall passive income streams. However, now that I&#;m older and have two young children, I really want to minimize the time I deal with maintenance issues and tenants.

Therefore, I&#;ve been investing more of my capital in real estate crowdfunding, REITs, and real estate ETFs. Real estate crowdfunding enables individuals to buy a percentage of a commercial real estate project that was once only available to ultra-high net worth individuals or institutional investors.

Owning individual physical real estate is great, but it&#;s like going all-in on one asset in a particular location with leverage. If the market goes down, your concentrated investment could lose big time if you are forced to sell. Many did during the last financial crisis.

My favorite real estate crowdfunding platform for accredited investors is CrowdStreet. They are focused on individual real estate projects in hour cities. Valuations tend to be lower and net rental yields tend to be higher in places like Memphis, Charleston, etc. If you like to pick your own deals and want to build your own select real estate fund, CrowdStreet is a great choice.

If you are not an accredited investor and like to invest in diversified funds, you can invest in private eREITs through Fundrise. Fundrise is the leader in this more diversified style of real estate and has been around since For the average investor, a diversified eREIT is probably the best way to go. Fundrise does the work for you so you don&#;t have to.

Unlike other passive investments on the list, with real estate crowdfunding you at least have a physical asset as collateral. Both platforms are free to sign up and explore.

% Passive Real Estate Income Is So Nice

For those of you who dislike dealing with tenants and maintenance issues, investing in real estate crowdfunding is wonderful.

In mid, I sold my San Francisco rental property for 30X annual gross rent. I reinvested $, of the proceeds in a real estate crowdfunding portfolio. The goal was to take advantage of lower valuations across the country with much higher net rental yields. Not having to deal with maintenance issues and tenant problems has been wonderful.

Coastal city real estate has become too expensive. I expect people and capital to naturally flow towards lower-cost areas of the country, especially post-pandemic. The future of work is remote. Take advantage of a multi-decade demographic shift inland.

Further, the performance of Fundrise&#;s eREITs has been relatively steady during stock market downturns. Therefore, if there is another crash, Fundrise eREITs should outperform. Real estate is defensive because it becomes more affordable as mortgage rates decline. Investors want real assets that provide shelter and income.

To be able to invest in real estate, but % passively is a great combination. You can invest in publicly-traded REITs as well for real estate exposure. However, as we saw in the violent March stock market downturn, REITs performed even worse.

Risk: 7, Return: 7, Feasibility: 10, Liquidity: 6, Activity: 10, Taxes: 7. Total Score: 47

The Best Passive Investment Rank #1: Dividend Investing

The best passive income investment is dividend-paying stocks. Dividend and value stocks are making a comeback after underperforming growth stocks during the pandemic. Value is back!

The “Dividend Aristocrats” are a list of blue-chip companies in the S&P that have demonstrated a consistent increase in dividend payouts over the years. Names such as McDonald&#;s, P&G, Sherwin-Williams, Caterpillar, Chevron, Coca-Cola, and Sysco Corpare considered some of the best blue-chip dividend stocks. But there are some dogs like AT&T.

Let’s say a company earns $1 a share and pays out 75 cents in the form of a dividend. That’s a 75% dividend payout ratio. Let’s say the next year the company earns $2 a share and pays out $1 in the form of dividends. Although the dividend payout ratio declines to 50%, due to the company wanting to spend more CAPEX on expansion, at least the absolute dividend amount increases.

Dividend stocks tend to be more mature companies that are past their high growth stage. As a result, they are relatively less volatile from a stock context. Utilities, telecoms, and financial sectors tend to make up the majority of dividend-paying companies. In , the S&P dividend yield is about %, which roughly equals the year bond yield.

Tech, Internet, and biotech, on the other hand, tend not to pay any dividends. They are growth stocks that reinvest most of their retained earnings back into their company for further growth. But growth stocks can easily lose investors tremendous value over a short period of time.

Pay Attention To Dividend Yields

To achieve $10, in annual passive income with a ~% S&P dividend yield would require $, Instead, you could invest only $, into AT&T stock given its % estimated dividend yield.

It all depends on your risk tolerance. I give dividend investing a 5 on Return because dividend interest rates are relatively low. Further, the volatility is now relatively high.

One of the easiest ways to get exposure to dividend stocks is to buy ETFs like DVY, VYM, and NOBL or index funds. Alternatively, you can DIY and use Personal Capital&#;s free financial tools to manage your wealth. The key is to invest consistently over time.

In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while being mostly invested in index funds. Dividend index investing is great because it is passive and liquid.

However, given dividend rates are low and volatility is high after a 12+-year bull market, the Return score is lower than in the past.

Risk: 6, Return: 5, Feasibility: 10, Liquidity: 9, Activity: 10, Taxes: 8. Total Score: 48

Best Passive Income Investments Review

Based on my new six-factor model for ranking the best passive income investments, the top five passive income investments are:

• Dividend Stocks
• Real Estate Crowdfunding, REITs, and Real Estate ETFs
• Creating Your Own Products
• Owning Rental Properties

If you can stomach occassional volatility, investing in dividend stocks is truly one of the best passive income investments over the long run. If you want less volatility with likely higher yields, invest in real estate crowdfunding, rental properties, and fixed income instead.

There was a time when I loved owning physical real estate the best. It was my favorite way to generate a steady stream of rental income. However, once I became a dad in , I no longer had as much time or energy to manage properties.

Real estate crowdfunding through platforms like Fundrise and CrowdStreet are good solutions for my real estate investment capital. % passive income is wonderful. I really like the combination of owning a hard asset that generates income. It&#;s a more stable way to grow wealth.

For those who are the creative types, starting your own website like this one and creating products online feels extremely rewarding. Some say making $1, on your own is like making $5, or $10, at a job.

However, blogging would score a 1 in the Activity Score since these posts don&#;t write themselves. Instead, you really want to create products like a book or a course to sell passively.

Finally, owning rental properties is becoming more attractive given how low interest rates have fallen. The value of rental income has increased so much that I&#;m looking to buy another physical rental property in

I&#;m bullish on the housing market for the next several years. As a result, I want to own as many rental properties as possible to benefit from rising rents and rising asset values.

Best Passive Income Investments Table

Once again, here are the best passive income investments. All eight passive income investments are appropriate ways for generating income to fund your lifestyle. The right ones depend on your personal preference, understanding of the investments, creativity, and interests.

Build More Passive Income Today

Enthusiasm for work is strongest when you are young and have very little money. After four years of high school, followed by another four years of college, work sounds like an exciting adventure! But after a while, your job can begin to beat you down.

Perhaps a coworker purposefully tries to make your life miserable because they resent your success. Maybe you get passed over for a promotion and a raise because you weren’t vocal enough about your abilities. Maybe you mistakenly thought you worked in a meritocracy. Whatever the case may be, you will eventually tire.

This is why it is important to take action while you still have the energy. With interest rates at rock bottom levels, building passive income will take a lot of effort and patience. Start now!

My Current Passive Income Investments

Below are my latest passive income streams that I&#;ve been building since Our passive income allows both my wife and I to be stay-at-home parents to two children. Our goal is to consistently generate $, in passive income and relocate to Hawaii for kindergarten by

As you can see from our passive income chart, roughly half of our passive income comes from real estate. Real estate is my favorite asset class to build wealth because it is relatively stable, generates income, and provides utility.

With economies opening up, I&#;m actively looking for hospitality real estate deals on CrowdStreet. CrowdStreet focuses on real estate opportunities in hour cities where valuations are lower and cap rates are higher. In addition, CrowdStreet has launched a build-to-rent fund to take advantage of the strong rental market.

Saving early and often is no sacrifice at all. Instead, the biggest sacrifice is living a life on someone else&#;s terms due to a lack of funds. Keep building the best passive income investments so you can one day be free.

Remember, if the amount of money you&#;re saving and investing doesn&#;t hurt, you&#;re not saving and investing enough. At the end of the day, nobody cares more about your money than you.

Now that you know the best passive income investments, it&#;s time to get cracking! Your future self will thank you.

Join 50,+ others and sign up for the free Financial Samurai newsletter. I&#;ve been writing about helping people achieve financial independence since Everything is written based off of firsthand experience. The Best Passive Income Investments is a www.oldyorkcellars.com original post. I have invested in all products mentioned for years.

For more information about Vanguard funds and ETFs, visit www.oldyorkcellars.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market 

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline. 

Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.

Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax. 

• The goal of investing for income is to generate a reliable cash flow from your assets at low risk.
• Common investment income assets include dividend-paying stocks, bonds, real estate, annuities, CDs, and money market accounts.
• Though they're traditionally associated with older investors, any portfolio should include some income-producing assets. 
• Visit Insider's Investing Reference library for more stories.

You can classify investors into two basic types. There are those who want appreciation — that is, they invest for growth. And there are those who ask of their assets "show me the money — now." 

We call the latter type income investors. Income investing involves building a portfolio using dividend-paying stocks, bonds, real estate, and other assets designed to generate cash on a recurring basis. 

With income investing, once you buy the asset, there isn't a whole lot more to do. This is buy-and-hold passive investing at its best. 

There are multiple types of investment income assets, and ways to invest for income. Here's a rundown of the most common.

1. Dividend stocks

What they are: Dividend-paying stocks are issued by companies that make cash payments per share, generally quarterly, based on how well the company is doing. The two main types of dividend stocks are called common and preferred.

How they work:Common stock dividends are set by the company's board of directors each quarter. You won't know the amount or even if there will be a dividend until the board decides.

Preferred stock dividends are more regular: pre-determined, fixed payments over a specified period of time. Also, preferred stockholders their dividends before common stock shareholders get theirs. 

Although common stock dividends are riskier, you stand to gain more. Preferred stock dividends are less risky, but generally lower.

What to know: The most consistent, good dividend-payers tend to be from blue-chip stocks — that is, those of large, well-established corporations. 

How to tell if a dividend is a good one? Look not just at the dollar amount, but at the dividend yield: that is, the company's annual dividend divided by its stock price and multiplied by (It's often indicated on a stock's online listing.)

Aim for stocks that pay a 2% to 6% dividend yield. That ratio indicates a decent payout relative to a company's earnings and market valuation and helps you avoid companies that may be borrowing excessively to inflate their dividends.

2. Bonds

What they are: Bonds are loans to the government or a company. Your income from bonds comes in the form of fixed-interest payments. As the bondholder (lender) you receive a fixed amount of interest income on a regular schedule. When the loan term ends, you receive your original investment back. 

How they work: The rate of interest you receive on a bond depends on the length of its term — the longer, the higher — the creditworthiness of the borrower, and the conditions of the market. There are three main types of bonds: 

• Government bonds, also known as Treasuries, are considered extremely reliable because they are backed by the US government, but the tradeoff is a relatively low interest rate.
• Municipal bonds are a form of government bonds issued by states, cities, counties, and other government entities. Interest is exempt from federal taxes and often from state and local taxes as well.
• Corporate bonds are issued by companies (both public and private) and therefore riskier than government bonds. For that reason, they pay a higher interest rate than government bonds. depending on the creditworthiness of the issuer.

What to know:  Bond prices tend to go up when the stock market goes down, making bonds a good tool to balance risk from equities, as well as an income source.

3. Real estate 

What they are: Although it can and does appreciate, real estate often provides a solid cash flow as well. The income derives from rents paid by tenants of residential, industrial, or commercial properties, and sometimes from mortgage interest on the properties as well. You don't have to become a landlord: REITS and RELPs are common ways to invest in real estate indirectly. 

How they work: Real Estate Investment Trusts (REITS) let you buy shares in a publicly traded company, which pays dividends to you much like stocks. The dividends can vary in both amount and frequency. REITs invest in a variety of projects and are considered ongoing, long-term investments. 

A real estate limited partnership (RELP) lets you pool your money with other investors to buy or develop real estate properties in a private (i.e., not publicly traded) investment. Formed to operate for over a period of years, a RELP offers excellent dividend payments annually, though the big money comes via distributions when the projects are complete and sold towards the end. As with a REIT, a RELP pays fluctuating dividends based on the type of real estate investments it makes. 

What to know:  Dividends in both cases are not fixed but can vary, depending on the profit/rent income received by the REIT or RELP. You stand to gain more with a RELP over a specific, shorter period of time than with a REIT. However, because they don't trade on public exchanges, RELPs can be harder to unload; REITs are much more liquid. 

4. Money market funds

What they are: Money market funds (MMFs) are a special type of fixed income mutual funds that invest in short-maturity, low-risk debt securities that pay dividends like most other income-producing investments. 

How they work: MMFs are low- volatility investments that may be taxable or tax-exempt, depending on the types of securities held. MMFs operate on the net asset value (NAV) standard, meaning they attempt to maintain a share value of $1. Any excess is distributed as dividends.

What to know:  Investors like the NAV standard because it forces fund managers to make regular dividend payments to investors, which provides that steady cash flow income investors prize.

5. Certificates of deposit

What they are: Banks also sell income-producing products that many investors include in their portfolios because of their relatively low risk. One of the most common is certificates of deposit (CDs). 

How they work: Certificates of deposit (CDs) are a type of savings account that come with terms ranging from six months to five years. The longer the amount of time you must keep your money in the CD, the higher the interest rate. 

What to know: If you want income (interest) from your CDs, most banks will let you take it out as it is earned at its fixed rate. Your principal, however, is usually locked in for the duration of the CD. 

6. Money market accounts

What they are: Money market accounts, sometimes called money market savings accounts, are another common bank product. They pay higher interest than regular savings accounts, but have more restrictions and often require a higher initial balance to get the best interest rate. 

How they work: You can make withdrawals (including interest) from your money market account up to six times a month.

What to know:  Money market accounts (and CDs too) are not considered major income investments, but rather savings vehicles. Still, they do earn some return, and of course, are highly liquid: Access is as close as the nearest bank branch. And both are FDIC-insured.

7. Annuities

What they are:Annuities are contracts sold by insurance companies that make regular payments to you for a set period or for life. You invest an initial sum, then the money is repaid to you in periodic installments, a process known as annuitization. The payments typically consist of both principal and interest.

How they work: The three main types of annuities are: 

• Fixed, which pay a set interest rate
• Variable, whose interest rate fluctuates, depending on the investments (usually mutual funds) you choose
• Indexed, which provide a return based on an index, such as the S&P

The risk depends on the underlying stability of the insurance company and the type of annuity: Fixed is the least risky and variable the most. 

What to know:  Compared to other types of investments, annuities are often criticized for high fees and expenses. 

The financial takeaway

Income investing is often associated with older, often retired investors: Common financial wisdom often has portfolios shifting from growth to income as their owners age. Still, all investors can and should include some income producers in their portfolio — as a counterbalance to aggressive growth assets, if nothing else. 

Generally speaking, the more risk you are willing to take or the longer you are willing to let your money work, the higher rate of return you will receive.

That said, the main purpose of income investing is to produce cash flow with a reasonable amount of risk. Income-producing stocks, bonds, and other securities are meant to be the stable foundation of your portfolio.

And you can always diversify your risk further by investing in income-oriented exchange-traded funds (ETFs) and mutual funds. Often identified with the words "dividend" or "income" or "high-yield" in their names, these invest in everything from real estate to select preferred stocks to corporate bonds.

What are mutual funds?

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.

Why do people buy mutual funds?
What types of mutual funds are there?
What are the benefits and risks of mutual funds?
How to buy and sell mutual funds
Understanding fees
Avoiding fraud
Additional information

Why do people buy mutual funds?

Mutual funds are a popular choice among investors because they generally offer the following features:

• Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.
• Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.
• Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.
• Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.

What types of mutual funds are there?

Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds. Each type has different features, risks, and rewards.

• Money market funds have relatively low risks. By law, they can invest only in certain high-quality, short-term investments issued by U.S. corporations, and federal, state and local governments.
• Bond funds have higher risks than money market funds because they typically aim to produce higher returns. Because there are many different types of bonds, the risks and rewards of bond funds can vary dramatically.
• Stock funds invest in corporate stocks. Not all stock funds are the same. Some examples are:
  • Growth funds focus on stocks that may not pay a regular dividend but have potential for above-average financial gains.
  • Income funds invest in stocks that pay regular dividends.
  • Index funds track a particular market index such as the Standard & Poor’s Index.
  • Sector funds specialize in a particular industry segment.
• Target date funds hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts according to the fund’s strategy. Target date funds, sometimes known as lifecycle funds, are designed for individuals with particular retirement dates in mind.

What are the benefits and risks of mutual funds?

Mutual funds offer professional investment management and potential diversification. They also offer three ways to earn money:

• Dividend Payments. A fund may earn income from dividends on stock or interest on bonds. The fund then pays the shareholders nearly all the income, less expenses.
• Capital Gains Distributions. The price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, the fund distributes these capital gains, minus any capital losses, to investors.
• Increased NAV. If the market value of a fund’s portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The higher NAV reflects the higher value of your investment.

All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.

A fund’s past performance is not as important as you might think because past performance does not predict future returns. But past performance can tell you how volatile or stable a fund has been over a period of time. The more volatile the fund, the higher the investment risk.

How to buy and sell mutual funds

Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The price that investors pay for the mutual fund is the fund’s per share net asset value plus any fees charged at the time of purchase, such as sales loads.

Mutual fund shares are “redeemable,” meaning investors can sell the shares back to the fund at any time. The fund usually must send you the payment within seven days.

Before buying shares in a mutual fund, read the prospectus carefully. The prospectus contains information about the mutual fund’s investment objectives, risks, performance, and expenses. See How to Read a Mutual Fund Prospectus Part 1, Part 2, and Part 3 to learn more about key information in a prospectus.

Understanding fees

As with any business, running a mutual fund involves costs. Funds pass along these costs to investors by charging fees and expenses. Fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you.

Even small differences in fees can mean large differences in returns over time. For example, if you invested $10, in a fund with a 10% annual return, and annual operating expenses of %, after 20 years you would have roughly $49, If you invested in a fund with the same performance and expenses of %, after 20 years you would end up with $60,

It takes only minutes to use a mutual fund cost calculator to compute how the costs of different mutual funds add up over time and eat into your returns. See the Mutual Fund Glossary for types of fees.

Avoiding fraud

By law, each mutual fund is required to file a prospectus and regular shareholder reports with the SEC. Before you invest, be sure to read the prospectus and the required shareholder reports. Additionally, the investment portfolios of mutual funds are managed by separate entities know as “investment advisers” that are registered with the SEC. Always check that the investment adviser is registered before investing.

Additional Information

Mutual Funds and ETFs – A Guide for Investors
Closed-End Funds
Index Funds
Smart Beta, Quant Funds and Other Non-Traditional Index Funds
Interval Funds
Mutual Fund Proxy Voting Records and Policies
Mutual Fund Investing: Look at More Than a Fund's Past Performance

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

*Automatically prefills an additional screen to the FundPicks selection criteria. Results are limited to FundPicks and funds with an SEC yield greater than 1%.

SEC yield: A standard yield calculation developed by the Securities and Exchange Commission for bond funds. The yield is calculated by dividing the net investment income per share earned during the day period by the maximum offering price per share on the last day of the period. The yield figure reflects the dividends and interest earned during the day period, after the deduction of the fund's expenses. It is sometimes referred to as "SEC Day Yield" or "standardized yield".

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal. High yield/non-investment grade bonds involve greater price volatility and risk of default than investment grade bonds. The securities of smaller, less well-known companies can be more volatile than those of larger companies.

Growth stocks can perform differently from the market as a whole and other types of stocks and can be more volatile than other types of stocks.

Value stocks can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets.

Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets.