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Dividend Yield Mutual Funds

Dividends are an important aspect of investing equity or equity-related instruments. Many companies share a portion of their profits with their shareholders by declaring dividends. Some companies pay high dividends, while others don’t declare dividends at all. It is not mandatory for companies to offer dividends; companies choose to declare them to make investing in their stocks more attractive. Here, we are going to talk about Dividend Yield Mutual Funds and explore some salient features and factors that you need to know about them.

List of Dividend Yield Mutual Funds

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What are Dividend Yield Mutual Funds?

Dividend Yield Mutual Funds Meaning: Dividend Yield is the dividend paid per unit divided by the market price. Dividend Yield Mutual Funds are equity funds that invest in equity and equity-associated instruments of companies that are known to declare high dividends. Further, a company can declare high dividends only if it makes good profits. Therefore, most of these stocks belong to profit-making companies with an excellent track record.

Typically, a dividend yield fund invests around 70-80% of its corpus in stocks that have a dividend yield higher than that of the market (or benchmark). Hence, it acts as a filter to help the fund manager in selecting stocks. Companies that pay good dividends usually have great cash flows and are more stable than most other stocks.

It is important to note here that the criterion is not merely high dividends but a high dividend yield. This means that if a stock pays good dividends, but its market price is very high, then the dividend yield is low, and the fund might not invest in it. Apart from the dividend yield, the fund managers also look at growth prospects and other fundamentals before investing.

Features of a Dividend Yield Funds 

The major characteristics of this fund are:

  1. Source of Income

Since the dividend is the key criterion for selecting stocks for this fund, you can expect a consistent return on your investment. However, the mutual fund company must book a profit on its holdings in order to provide dividends to investors.

  1. Lower Risks

Dividends are paid on a regular basis by extremely stable organizations that are well-known in the market and have a strong brand. These are often major corporations with substantial market capitalizations. As a result, the risk factor is decreased because the stocks of these companies are not adversely influenced by short-term market volatility. 

How Does a Dividend Yield Mutual Fund Work?

A dividend mutual fund often invests in equities of firms that pay out higher dividends. Dividend mutual funds invest in firms that have a track record of raising dividends or paying out high dividend yields.

A mutual fund with a dividend option, on the other hand, may not be a suitable choice for some because its NAV, or Net Asset Value, does not grow rapidly. This occurs when dividends are given out promptly upon reaching a certain threshold. 

As a result, dividend mutual funds are appropriate for investors with a low-risk tolerance, the ones who want to receive monthly payouts as a source of income.

How Should You Invest in a Dividend Yield Mutual Fund?

Dividend Yield Funds are equity schemes that focus on the dividend yield of stocks. Since these companies are generally stable, it is recommended for investors who want to invest in equity but are looking for lower volatility. While these are not recommended for aggressive growth-seekers, such funds are a good addition to most investment portfolios.

You can invest in these funds through different methods, and they are:

  1. a) One such method is through the respective portal of the mutual fund or intermediary, Groww.
  2. b) You can invest through the branch office or designated investment service centre. 

Why Should You Invest in a Dividend Yield Fund?

The following are the key benefits of investing in dividend-yield mutual funds:

a) A Regular Source of Income

These funds have the potential to pay out consistent dividends. Therefore, you will have a source of income to rely on.

b) Less Volatile

Market swings have little impact on the underlying firms of these funds. You would not have to worry about drastic changes in the market affecting your investment. These funds significantly reduce market volatility.

c) Good Returns in the Long Run

In the long run, these funds have the potential to give a substantial return on investment. They can also be appealing to first-time investors.

Taxation Rules of Dividend Yield Mutual Funds

According to the Union Budget for 2023, there would be no indexation benefit for debt funds beginning April 1, 2023. As a result, any forms of profits (LTCG or STCG) made from loan funds are taxed at the corresponding income tax slab rate. It applies to investments made on or after April 1, 2023. Investments made before April 1, 2023, on the other hand, are taxed differently.

  • Long-Term Capital Gains - 15% with indexation benefits
  • Short-Term Capital Gains - As Per the tax slab
  • Dividend Yield - 10% TDS

FAQs

Q1. Are dividend yield funds a good investment?

They can be a great investment for low-risk and first-time investors since these funds carry only a few risks.

Q2. Where are dividend yield funds invested?

A dividend yield fund needs to invest at least 65% of its portfolio in dividend-yielding products, according to the Securities and Exchange Board of India or the SEBI. 

Q3. Who can invest in dividend yield funds?

These funds give a stable return because they often invest in mature or large-cap companies. Investors seeking reliable returns and, more importantly, recurring dividend income can invest in these products. 

Q4. Can dividend yield funds be a source of passive income?

Dividend yield funds are passive income-generating funds perfect for investors seeking a consistent income stream from their investments. The primary goal of dividend yield funds is not capital appreciation but rather the identification and investment in equities that pay out regular dividends to investors.

Q5. What is the Minimum Investment in a Dividend Yield Fund?

If you want to invest monthly through a Systematic Investment Plan (SIP), you can start with as little as Rs. 500.

Disclaimer - Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

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