Best Dividend yield funds are a class of mutual funds that predominantly invest in securities that are known to provide regular dividends.
Introduction to Best Dividend Yield Funds
Dividend yield funds are a type of mutual funds that invest mostly in companies that have the potential to provide regular dividend payout. As per the norms of the Securities and Exchange Board of India (SEBI), a dividend yield fund invests at least 65% of its portfolio in dividend-yielding instruments.
Dividend yield mutual funds are further classified based on the equity exposure of the funds. If the fund is having an equity exposure of more than 65%, then it is classified as a dividend-yielding equity fund. If not, then the fund is classified as a dividend-yielding debt fund.
Top Dividend Yield Funds
The following table shows the top-performing dividend yield funds as per the last 5-year returns:
| Mutual fund | 5 Yr. Returns | 3 Yr. Returns | Min. Investment | Rating | |
|---|---|---|---|---|---|
ICICI Prudential Dividend Yield Equity Fund - Direct Plan - Growth | 12.23% | 29.96% | ₹5000 |
| |
ICICI Prudential Dividend Yield Equity Fund | 11.07% | 28.43% | ₹5000 |
| |
Templeton India Equity Income Fund - Direct Plan - Growth | 14.64% | 28.36% | ₹5000 |
| |
Templeton India Equity Income Fund Growth | 12.84% | 24.06% | -- | NA | |
ICICI Prudential Dividend Yield Equity Fund Direct Reinvestment Inc Dist cum Cap Wdrl | 9.66% | 23.54% | -- | NA | |
ICICI Prudential Dividend Yield Equity Fund Direct Payout Inc Dist cum Cap Wdrl | 9.66% | 23.54% | -- | NA | |
Templeton India Equity Income Fund Direct Rnvstmnt of Inc Dist cum Cap Wdrl | 12.46% | 22.89% | -- | NA | |
Templeton India Equity Income Fund Direct Payout of Inc Dist cum Cap Wdrl | 12.46% | 22.89% | -- | NA | |
Aditya Birla Sun Life Dividend Yield Fund - Direct Plan - Growth | -- | 22.59% | ₹1000 |
| |
Templeton India Equity Income Fund Rnvstmnt of Inc Dist cum Cap Wdrl | 11.61% | 21.9% | -- | NA |
What are Dividend Yield Funds?
The main intention of the dividend yield funds is to provide investors with regular dividends. This is made possible by the fund manager by investing mostly in the securities of companies that have the potential to offer regular payout. However, the dividends are not guaranteed and are subject to market performance.
The name of the class of the mutual funds only implies the strategy that the fund manager adopts rather than the actual performance of the funds. The fund manager and his team of researchers and analysts pick only those companies that are in line with the objective of the fund.
Features of Dividend Yield Funds
Multiple mutual funds offer high returns to their investors. In this regard, dividend yield funds are equity schemes that emphasise the dividend yield of stocks. Hence, it aids the fund managers in extracting the maximum value out of their speculations. Some of the additional features of dividend yield funds are as follows:
- Such mutual funds invest in companies that regularly pay back to stakeholders in the form of high dividends to boost investors’ worth.
- There is an option where these companies can either distribute the net profit among the stakeholders or reinvest that year’s profit.
- These funds invest a majority of their corpus in dividend-yielding stocks. This signifies that the companies with these stocks pay a better-than-expected profit regularly.
- The dividend is paid only from the profits of a mutual fund from the holdings of the fund.
- According to SEBI guidelines, these funds need to invest at least 65% of the assets in dividend-paying stocks.
How does the Dividend Mutual Funds Work?
A dividend mutual fund typically focuses on stocks of companies with increased dividend payout. Dividend mutual funds invest in companies with a history of increasing dividends or high dividend yields.
For example, this fund invests in companies like government-owned or private sectors that regularly pay back high dividends to the stakeholders. This fund primarily provides investors with annualised payouts. Accordingly, these payouts are further made regularly. As a result, as an investor, you will have reassurance and security with these funds. This dividend will be paid from the profit procured by the fund during the previous year.
However, a mutual fund with a dividend option is not considered a good choice as it does not show high growth in its NAV or Net Asset Value. It happens because the dividends are paid out on coming at a particular level immediately. Therefore, dividend mutual funds are ideal for investors who want to get regular pay outs as a source of income and have a low risk appetite.
Who Should Invest in Dividend Yield Funds?
Investors that are looking to earn a regular income should consider investing in a dividend yield fund. The dividends yielded by this class of mutual funds may not be significant, but no income can be ignored. However, as mentioned earlier, the dividend payout cannot be guaranteed and depends entirely on the performance of the underlying companies and market movements.
These funds are ideal for first-time equity investors as the underlying companies that these funds invest in are much stabler and are capable of sailing through the volatile market scenario. Even during the market lows, the underlying companies of dividend yield funds provide some dividend payout.
Taxation of Dividend Yield Funds
After the amendments made in the Union Budget 2020, the dividends offered by mutual funds are now taxed in the hands of investors as per the income tax slab they fall under. The rate of taxation of capital gains offered by these funds depends on the holding period and the type of equity exposure.
If the equity exposure is more than 65%, then the rules of taxation of equity funds apply. If not, then the rules of taxation of debt funds apply. Therefore, you have to be mindful of equity exposure before you invest. This helps you in planning your taxes better.
Advantages of Dividend Yield Funds
The following are the most significant advantages of dividend yield mutual funds:
- These funds have the potential to offer regular dividends.
- The underlying companies of these funds are not affected much by the market movements.
- These funds mitigate market volatility to a great extent.
- These funds have the potential to provide a high yield on investments in the long run.
- First-time investors may consider investing in these funds.
Conclusion
If you are planning to invest in dividend yield funds, you must refrain from making decisions based on the fund’s current performance. Although it will offer high returns during the bull phase, but the returns can fall radically during the bear market. Subsequently, it is essential to consider funds with low expense ratios, decent corpus size and low historical volatility. To make a better decision, looking at the best dividend-paying mutual funds would be wise.
Frequently Asked Questions
1. What is the frequency of dividend payout in the dividend yield fund?
The frequency of dividend payout can be quarterly, monthly or biannually. However, a special dividend is paid on a one-time basis, outside of the scheduled dividend payouts.
2. What is the difference between dividend and dividend yield?
A dividend is the share of earnings that a company pays to its shareholders. In contrast, the dividend yield is the percentage of the stock’s price that the company returns as dividend to its shareholders.
3. Do you pay taxes on dividends?
Yes, as per the Finance Act of 2020, the dividend tax has been shifted to the hands of the investors. You need to pay a 10% tax on dividend amount of more than Rs.5,000 in one financial year.
4. Is a dividend yield of 3% good?
Ideally, a 2 to 4% dividend yield is considered strong. It is because, in a scenario where it is more than 4%, it is considered to be a great buy but eventually contains higher risks.
5. Is investing in a dividend mutual fund a good idea?
As an investor, if you are looking for something with lower volatility and risk, you can invest in dividend mutual funds. However, for an aggressive growth-seeking investor, there are better options to rely on.
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