What is a Dividend Yield Fund?
- 6 min0•
- 06 Oct 2023
Key Highlights
- Dividend yield funds invest majorly in dividend based stocks.
- Some of the factors such as taxation is about 10% on dividend amount of more than Rs.5000/-
- Dividend funds are known to mitigate risk such as market volatility.
Meaning of Dividend Yield Funds
Dividend yield funds are a category of equity mutual funds that invest specifically in stocks of companies that pay out high dividends. The focus is on stocks that provide higher dividend yields compared to average market level. The portfolio of dividend yield mutual funds include established bluechip companies, utilities, realty firms etc. These companies as you notice have a track record of stable dividend payouts. The dividend income earned is distributed by the fund to unit holders either monthly, quarterly or annually.
These funds are suitable for investors seeking regular income along with potential capital appreciation. However, the returns tend to be more muted compared to pure growth-oriented equity funds. Dividend yield funds provide a balanced way to benefit from both dividends and moderate capital gains in an equity portfolio.
Top Dividend Yield Mutual Funds In India
| Fund Name | Fund Size in Cr | 3 Year Return | 5 Year Returns |
|---|---|---|---|
ICICI Pru Dividend Yield Equity Fund – Direct Growth | 2,216 | 34.7% | 16.3% |
Templeton India Equity Income Fund – Direct Growth | 1,565 | 31% | 17.1% |
Aditya Birla SL Dividend Yield Fund – Direct Growth | 992 | 26.7% | 14.3% |
UTI-Dividend Yield Fund – Direct Growth | 3,108 | 23.5% | 13.9% |
Sundaram Dividend Yield Fund – Direct Growth | 567 | 23.5% | 13.9% |
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions.
Features of Dividend Yield Funds
In the share market, each mutual fund has its own features, advantages & disadvantages. Just like that dividend yield funds has its own features some of them is as follows:
1. Dividend History Dividend yield funds focus on stocks with a consistent track record of dividend payments over many years. This indicates disciplined capital allocation by the company.
2.High Current Yield Here the funds pick stocks offering high dividend yields relative to their share price and industry peers. Stocks with yields above 4-5% are generally preferred for this mutual funds portfolio.
3.Business Stability The companies with mature businesses, steady cash flows and low debt are favored to be added in these mutual funds, as they are likely to sustain dividends during downturns.
4.Cash Reserve The most important phase is to look for firms with strong cash balances and low payout ratios to ensure dividend continuity in the long run.
5.Diversification A dividend yield mutual fund constructs a diversified portfolio across sectors and market caps to benefit from dividends in varied market conditions.
Additionally, factors like corporate governance, economic moat and growth prospects also play a role in selecting dividend paying stocks. Moderately risky investors who want regular income and some capital appreciation can consider investing a portion of their equity funds into dividend yield schemes.
How Dividend Yield Funds Work?
Dividend yield funds are a type of equity mutual fund that invest specifically in stocks that pay high dividends. The fund manager builds a portfolio of companies across various sectors that have a track record of consistent dividend payments. The dividend income earned from the underlying stocks is aggregated at the fund level.
The fund then distributes this dividend income periodically to the unit holders after deducting expenses. Investors in dividend yield funds can earn regular income in the form of dividends. In addition, capital appreciation potential also exists as the share prices of underlying stocks appreciate over time. Dividend yield funds allow investors to earn stable income along with possible long-term capital gains without having to individually select dividend stocks. However, the returns tend to be more moderate compared to pure growth-oriented equity funds.
Therefore, dividend yield funds provide investors a convenient way to earn regular income in the form of dividends. It promotes investments in a basket of high dividend yield stocks. And most importantly it serves as a balanced income and growth option in equity investing.
Advantages of Dividend Yield Funds
Dividend yield funds provide regular dividend payouts, usually on a monthly or quarterly basis, offering a steady stream of income.
Some of the advantages of dividend yield funds is as follows:
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It invests in stocks which have exhibited relatively lower price volatility compared to high growth stocks. This helps to mitigate risk.
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Rising dividend amounts over time can help counter the diminishing effects of inflation on investment returns.
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In addition to dividends, capital appreciation in share prices of mature companies also adds to investor returns.
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Investing across dividend stocks across various sectors results in diversification of income sources and risks.
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With the help of these funds, the portfolio composition and dividend track record provides clarity on income generation.
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At last the dividends get reinvested automatically to buy more units thus enabling compounding benefits.
How to Invest in Dividend Yield Mutual Funds?
To invest in dividend yield mutual funds follow the below steps:
- Open an demat account with Kotak Securities from Kotak Securities app or website.
- Login in Kotak Securities Demat account.
- Go to Mutual Funds section
- Search Dividend Yield Funds, list of dividend mutual funds will appear.
- Select funds where you wish to invest, enter SIP or Lumpsum amount.
- Make the payment or schedule your SIP.
Taxes on Dividend Yield Fund
Dividend income from equity mutual funds is tax-free in the hands of investors as the fund house pays a 10% Dividend Distribution Tax before distributing dividends. However, capital gains tax applies when the units of dividend yield funds are redeemed - 15% short-term tax on profits if redeemed before 12 months and 10% long-term tax on gains above Rs 1 lakh if redeemed after 12 months.
Conclusion
Whether you are planning to invest in mutual funds or shares, it's important to do your own research. You have lots of options to invest in mutual funds. One of them is the dividend yield fund, where you invest in companies that have a good record of dividend payouts. To know more about investing, you can open Kotak Securities. Improve your knowledge about the stock market from Kotak Securities, open your trading account online from Kotak Securities to get the latest updates, and explore different trading tools.
FAQs on Dividend Yield Mutual Funds
How long should you stay invested in Dividend Yield Mutual Funds?
There is no set rule for how long you should stay invested in a dividend yield mutual fund. These types of funds tend to be longer-term investments, so you may want to consider a time horizon of at least 5-10 years. However, you can sell at any time based on your investment goals.
Where do Dividend Yield Mutual Funds invest?
Dividend yield mutual funds invest primarily in stocks of companies that pay out higher than average dividends. They tend to focus on stocks of mature, established companies across different sectors.
What is the difference between the dividend and dividend yield in the stock market?
A dividend is the cash payment a company pays out to its shareholders, usually on a quarterly basis. Dividend yield is the financial ratio that shows how much a company pays out in dividends relative to its stock price. It is calculated by dividing the annual dividend amount per share by the current market price per share.
Is a dividend yield of 3% good?
A 3% dividend yield is not bad, but ideally looking for an investment which has 2 to 4% dividend yield is considered to be strong and more than 4% is also a great buy but does come with investment risk.
Is it good to invest in dividend yield funds?
Investing in dividend yield mutual funds can be a good strategy, especially for income-oriented investors. These funds provide portfolio diversification, steady income from dividends, and growth potential. Dividend payers also tend to be mature, quality companies.But before investing one must do their own research & invest as per their risk appetite.
