Best Dividend Yield Mutual Funds

Here are two salient features of dividend mutual funds: 

Asset allocation: According to Securities and Exchange Board of India (SEBI) rules, a dividend yield mutual fund must invest at least 65% of the fund corpus in equity and equity-related instruments. 

Risk-reward ratio: Top dividend yield mutual funds principally deal with stocks. Hence, their performance is vulnerable to market volatility. However, these schemes are less volatile than most of the other equity-oriented funds because they invest in shares of top companies.  Thus, it’s highly probable that they’ll underperform in a bullish market compared to other equity-based schemes.

Short-term capital gains: Short-term capital gains tax of 15% is applicable on the gains from selling units with a holding period of less than 1 year. 

Long-term capital gains: Gains from the sale of units with a holding period of more than one year are taxed at 10%. However, please note that LTCG tax is only applicable on the amount exceeding Rs.1 lakh. Gains of up to Rs.1 lakh are tax-free. 

TDS: Dividends realised from an MF scheme of this type are taxable @ 10% if the sum exceeds Rs.5000.

Underlying securities in these funds primarily include stocks of companies with an impressive cash flow position. It allows them to pay dividend regularly. Accordingly, investors can take advantage of dividends by allocating their savings to the best dividend yield mutual fund. Hence, these are known to be suited for investors looking for exposure to equity without assuming too much risk. These are seldom suited for an aggressive return outlook, however, since underlying stocks usually offer stable growth opportunities.

Nonetheless, investors need to take the following things into account to decide the best dividend yield mutual funds for them:

Investment objective: The investment objective of every individual is different. While one might seek stability and regular income, another investor may have an aim to maximise their portfolio value in the short term. Hence, it’s crucial for individuals to identify their investment objective before allocating their funds to the best dividend yield mutual funds 2022. 

Risk appetite: The risk-bearing capacity varies from one investor to another. For example, a conservative investor will not want to opt for an option that is impacted by volatile market conditions significantly.  Hence, it’s essential for an individual to assess his/her risk profile before parting with their savings. 

Experience of the fund manager: Fund managers of dividend yield mutual funds make changes to a portfolio based on extensive research and analysis. Hence, a fund’s performance depends on how effective its managers’ decisions are. A fund manager with a proven track record is more likely to realise a scheme’s objective. 

Exit load: This refers to a charge that investors have to pay if they redeem their units prematurely. This fee varies from one mutual fund scheme to another. Individuals must make sure to know the exit load before investing in a dividend yield mutual fund. 

Expense ratio: This refers to the yearly maintenance charge levied by a fund house on investors to finance its operating and administrative expenses. This cost has a bearing on a scheme’s NAV, which decides the returns. One must compare the expense ratio of different schemes and consider other vital factors to decide which is the best dividend yield mutual fund for them. 

Direct or regular plan: A direct plan is offered by a fund house directly to investors. No third parties like brokers or distributors are involved in this case. Hence, they report a higher NAV and have a lower expense ratio when compared with regular plans that involve third parties.

Investors can reap these benefits by investing in the best dividend yield mutual funds:

• Equity exposure with lower risk: Dividend yield mutual funds are relatively less impacted by market volatility than other equity-oriented MF schemes. Hence, investors who are seeking equity exposure and higher returns than fixed-income instruments, such as bank fixed deposits, can benefit from schemes of this sort. 
• High returns over a long term: Since dividend yield funds invest in shares of companies that have strong financials and a proven track record, they have the potential to generate high returns in future.

• Regular income: Since underlying companies in these schemes declare regular dividends, MFs can be an appropriate option for investors seeking regular income and stability.  

Investment routes: Investors can allocate their funds to these schemes via two routes – lump-sum and a Systematic Investment Plan (SIP). The first option allows an individual to invest the entire amount at once. By taking the SIP route, investors can allocate their savings to the best dividend yield mutual funds at fixed intervals, such as monthly, quarterly, or yearly.