Often people say that investing in equity dividend yield mutual funds is a good idea. But are they actually good?

Will these funds suit you?

Are these funds suitable for everyone?

Before investing in dividend mutual funds, you need to be sure that these funds would suit your objective.

In this blog, we seek to discuss the dividend plan while also highlighting the best dividend yield plans to invest in.

Read on!

What are dividend yield funds?

Dividend yield mutual funds are funds that primarily invest in companies that pay regular dividends.

How can you buy dividend plans for a mutual fund?

For our novice readers, dividends are the profit that is distributed by the company to its shareholders.

Best Dividend Funds 2019 - At a Glance
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Principal Dividend Yield Fund Direct-Growth -1.07% 12.2% 10.15% 1.86% 61% Equity
(Dividend Yield)
Moderately High
UTI Dividend Yield Fund Direct-Growth 2.39% 9.75% 8.36% 1.53% 4% Equity
(Dividend Yield)
Moderately High
Templeton India Equity Income Direct Plan-Growth -0.77% 10.12% 9.95% 1.77% 3% Equity
(Dividend Yield)
Moderately High
ICICI Prudential Dividend Yield Equity Fund Direct-Growth -2.69% 8.09% 8.51% 1.87% 82% Equity
(Dividend Yield)
Moderately High
Aditya Birla Sun Life Dividend Yield Fund Direct-Growth -6.06% 4.01% 5.42% 1.75% 37% Equity
(Dividend Yield)
Moderately High

Best Dividend Funds 2019 – Details

1. Principal Dividend Yield Fund-Direct

The scheme strives to provide capital appreciation by investing predominantly in a well-diversified portfolio of companies that have a relatively high dividend yield.

Key Information

Launch Date 25th November, 1994
Category Dividend Yield
Benchmark CRISIL Hybrid 50+50 Moderate Index (VR Balanced TRI)
Expense Ratio 2.11%
Risk Moderately High
AUM ₹197 crore
Fund Managers  Dihant Shah
Investment instruments Equity and cash

Source: Groww

Holding Analysis

Source: Groww

Why Invest in Principal Dividend Yield Fund?

  • The fund has generated superior returns over a multi-trailing period, thereby making it one of the most sought-after funds in the category.
  • However, the fund suffers from low asset under management (AUM) which is below Rs 500 crore.
  • Thus the expense of fund management becomes high. Also, the fund has a marginally higher risk when compared to the category average.

Also, know about the best large-cap funds of 2019

2. UTI Dividend Yield Fund-Direct 

The scheme seeks to generate long-term capital appreciation and income by investing predominantly in dividend yielding equity and equity-related securities.

Key Information

Launch Date
1 Feb 2003
Category Dividend Yield
Benchmark CRISIL Hybrid 50+50 Moderate Index (VR Balanced TRI)
Expense Ratio 1.53%
Risk Moderately High
AUM ₹2,438 Cr
Fund Managers  Swati Anil Kulkarni
Investment instruments Equity and cash

Source: Groww

Holding Analysis

Source: Groww

Why Invest in UTI Dividend Yield Fund-Direct?

  • The fund has generated superior returns over the last one-year period.
  • The fund comes with a low-risk profile as compared to category average but has higher expense ratio despite sizeable assets under management.
  • The fund’s beta is 0.96 which indicates a balanced nature concerning aggressive and conservative stocks.

3. Templeton India Equity Income Fund-Direct

The fund seeks to offer a combination of regular income and long-term capital appreciation by investing in stocks that have an attractive dividend yield or potentially attractive dividend yield.

The investment strategy adopted is value investing.

Key Information

Key Information

Launch Date
19th February 1996
Category Dividend Yield
Benchmark CRISIL Hybrid 50+50 Moderate Index (VR Balanced TRI)
Expense Ratio 1.83%
Risk Moderately High
AUM ₹940 Cr
Fund Managers  Srikesh Nair, Lakshminath Reddy, Anand Radhakrishnan
Investment instruments Equity and cash

Source: Groww

Holding Analysis

Source: Groww

Why Invest in Templeton India Equity Income Fund?

  • The fund has generated superior returns over a multi-trailing period.
  • However, the fund suffers from a high expense ratio, despite average assets under management is between Rs. 500 crore and Rs. 1000 crore.
  • Also, the fund has a marginally lower risk when compared to the category average.

Top Mid-Cap Mutual Funds to Invest

4. ICICI Prudential Dividend Yield Equity Fund-Direct 

The scheme seeks to provide medium to long-term capital appreciation and dividend distribution by investing in a well-diversified portfolio of predominantly equity and equity related instruments, which offer attractive dividend yield.

Key Information

Launch Date
13th October, 1993
Category Dividend Yield
Benchmark CRISIL Hybrid 50+50 Moderate Index (VR Balanced TRI)
Expense Ratio 1.79%
Risk Moderately High
AUM ₹173 crore
Fund Managers  Priyanka Khandelwal, Mrinal Singh, Mittul Kalawadia
Investment instruments Equity and cash

Source: Groww

Holding Analysis

Source: Groww

Why Invest in ICICI Prudential Dividend Yield Equity Fund?

  • The fund has generated superior returns over the multi-trailing period.
  • The fund has a marginally lower risk when compared to the category average. However, the fund suffers from high expense ratio due to low assets under management that is below Rs.500 crore.
  • The beta for the fund is 1.01 thereby reflecting a well-balanced characteristic of the portfolio thus indicating that the returns are a result of stock selection and not the market movement.

As of now, we looked at 4 funds which are dividend funds itself.  But most other funds have a dividend plan as well. Here is a bonus list of the funds which have a good dividend plan.

Bonus List

Serial No. Mutual Fund Scheme name Fund Category NAV (as on date of last dividend declared)  

Last Dividend Date

Dividend (Rs. / unit) Trailing 1 year Annual Dividend Yield (Distribution Yield)
1 Aditya Birla Sun Life Balanced Advantage Fund – Dividend Plan Hybrid  – Balanced Advantage 20.26 25/03/2019 0.13 8.03%
2 HDFC Balanced Advantage Fund – Dividend Plan Hybrid – Balanced Advantage 29.39 25/03/2019 0.31 10.44%
3 ICICI Prudential Equity & Debt Fund – Dividend Plan Hybrid – Aggressive 22.94 03/04/2019 0.2036 10.79%
4 Aditya Birla Sun Life Regular Savings Fund – Dividend Plan Hybrid – Conservative 14.20 29/03/2019 0.0764 5.28%
5 Axis Enhanced Arbitrage Fund – Dividend Plan Hybrid – Arbitrage 10.52 25/03/2019 0.0443 5.06%
6 Edelweiss Arbitrage Fund – Dividend Plan Hybrid – Arbitrage 14.1 14/03/2019 0.443 5.33%
7 ICICI Prudential Equity Arbitrage Fund – Dividend Plan Hybrid – Arbitrage 13.62 28/03/2019 0.0259 5.29%
8 ICICI Prudential Balanced Advantage Fund – Dividend Plan Hybrid – Balanced Advantage 14.3 08/04/2019 0.0620 5.97%
9 ICICI Prudential Equity Savings Fund – Dividend Plan Hybrid – Equity Savings 13.97 28/03/2019 0.2023 6.94%

Why Invest in Dividend Mutual Funds?

People looking to gain a steady monthly income can choose from a variety of options available today in the market. Some of them being investing in monthly income schemes of post offices, pension schemes for retired people, fixed deposits etc.

However, although these options can present themselves to be safe choices, they would not give you substantial returns. A dividend mutual fund can come to your rescue in this situation.

There are various funds that provide monthly dividends as given above and the investor can choose the ideal fund based on his/her requirement.

How Do Dividend Paying Mutual Funds Work?

Some mutual fund schemes invest in high dividend paying companies. These companies hence provide dividends and are known as ‘dividend yield funds’.

(Note: Dividend yield is calculated by dividing the sum of dividends paid during the term by its current NAV. The result is then annualized to arrive at the annualized dividend yield)

One important thing to note here is that most dividend paying mutual funds do not show high growth in their NAV (net asset value) because dividends on such funds are paid out at reaching a specific level immediately.

This medium is, therefore, best for investors who do not have a high-risk appetite and require regular payouts of income.

A dividend is a source of income and can be used to buy more units of the mutual fund. Investors who prefer buying dividend funds are typically the ones who look out for a source of income.

In simple words, investors looking for steady and reliable payment from their mutual fund investment invest in dividend yield funds.

Benefits of Dividend Paying Mutual Funds

There are four fold benefits that we can think of when we invest in dividend paying mutual funds.

1. A stream of steady cash flow is generated through this investment;

2. Most mutual funds invest in companies that are mature enough to pay stable dividends and hence the risk is undertaken is also less;

3. Dividend income can act as a supplementary income over and above your regular flow of cash;

4. The most important of all is that dividends are tax exempt in the hands of the investors;

Taxation on Dividend Distribution

LTCG and STCG: Everything to know

When it comes to taxation, asset management companies have to pay 28.84 percent as dividend distribution tax (DDT) in case of debt mutual funds (inclusive of cess and surcharge).

Equity mutual funds attract DDT of 10 percent. Hence it would be best for investors to put their money in equity mutual funds that have a track record of paying stable dividends.

Is it Suitable for You?

Due to the income generating nature of dividend yield funds, these funds are best suited for retired investors.

Also, these funds are typically less aggressive when compared to pure-play equity fund that adopts a growth strategy. Thus, these funds are also suitable for individuals who are risk-averse.

Why are YOU afraid of investing in mutual funds?

Additionally, investors prefer dividend yield funds against bond funds. This strategy is typically seen in an environment where interest rates are low but economic conditions are generally good.

This situation results in lower yields for bond fun than dividend yield fund.

Growth plan or dividend reinvestment plan – which is better?

Why Should You Invest in Dividend Yield Funds?

The fund manager of a dividend yield fund typically invests between 65% and 80% of the fund corpus in stocks that have a higher dividend yield (dividend per unit divided by market price).

The fund manager seeks to invest in companies with stable cash flows and is in a position to pay dividend regularly and at a steady rate.

These companies do not reduce dividend payout even during a downturn. Such investments tend to provide stability to the fund, thereby making it less volatile compared with their growth-oriented, diversified peers.

Here Are the 30 Best Funds Handpicked by Groww: Groww 30

During a downturn, when the dividend yield of such funds tends to fall, the value aspect of these funds comes into play. This scenario makes these names appear attractive from a dividend yield angle.

Happy Investing!

The views expressed in this post are that of the author and not those of Groww

 

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