Growth-based equity mutual funds only appreciate when the invested stock prices rise, but there are mutual funds that also earn when the invested stocks or companies pay dividends. These mutual funds are known as dividend yield funds. In this blog, we’ll know about the dividend yield fund meaning, some of the best dividend yield mutual funds, and their pros and cons.
What is Dividend Yield Fund?
Dividend yield funds are the type of equity funds that have to invest at least 65% of their corpus in stocks (specifically in dividend-yielding stocks) as per the SEBI guidelines. These funds invest in companies that are well-established and have sound cash flows to pay regular dividends.
But what is dividend yield? The dividend is the part of the company’s profits that it distributes to its shareholders. A dividend yield is a ratio that shows how much dividend (per share) a company pays relative to its current share price. The higher the dividend yield of a stock, the better it is. The main feature of the high-dividend yield stocks is that they are less volatile than the growth stocks.
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Best Dividend Yield Funds to Invest Now
Here is the list of the top dividend yield mutual funds (Direct-Growth) to invest in for the long term:
| Dividend Yield Fund Name | Benchmark | Fund Size (in ₹ crores) | 3 Year Returns (%) | 1 Year Returns (%) | Expense Ratio (%) | ||
|---|---|---|---|---|---|---|---|
| Fund | Fund | Benchmark | Fund | Category Avg | |||
| ICICI Prudential Dividend Yield Equity Fund | Nifty 500 TRI | ₹4,783.44 | 26.45% | 27.36% | 21.56% | 0.93% | 0.57% |
| HDFC Dividend Yield Fund | Nifty 500 TRI | ₹6,140.17 | 23.51% | 22.70% | 21.56% | 1.00% | 0.65% |
| SBI Dividend Yield Fund | Nifty 500 TRI | ₹9,555.94 | – | 22.23% | 21.56% | 1.00% | 0.76% |
| Tata Dividend Yield Fund | Nifty 500 TRI | ₹985.68 | 19.84% | 18.72% | 21.56% | 0.93% | 0.69% |
| UTI Dividend Yield Fund | Nifty 500 TRI | ₹4,203.16 | 19.88% | 31.64% | 21.56% | 1.00% | 1.39% |
*(Data as on December 17, 2024)
Overview of the 5 Best Dividend Yield Funds
Here are the details of the 5 best dividend yield funds (as on December 17, 2024):
1. ICICI Dividend Yield Fund
ICICI Dividend Yield Fund NAV is ₹55.82. The minimum SIP amount is ₹100 while the lump sum investment is ₹5,000. The fund’s alpha is 9.61 and beta is 0.86. The top 3 stock allocations of this fund are HDFC Bank, ICICI Bank, and Maruti Suzuki India.
Through a monthly SIP of ₹1,000 for 3 years, ICICI Dividend Yield Fund can grow your total investment of ₹36,000 to more than ₹55 thousand.
2. HDFC Dividend Yield Fund
The next one on the list of best dividend yield funds is HDFC Dividend Yield Fund and its NAV is ₹26.78. The minimum SIP amount is ₹100 while the lump sum investment is ₹100. The fund’s alpha is 5.63 and beta is 0.96. The top 3 stock allocations of this fund are HDFC Bank, ICICI Bank, and Infosys.
Through a monthly SIP of ₹1,000 for 3 years, your total investment of ₹36,000 in HDFC Dividend Yield Fund would become approx ₹52 thousand.
3. SBI Dividend Yield Fund
SBI Dividend Yield Fund NAV is ₹15.58. The minimum SIP amount is ₹500 while the lump sum investment is ₹5,000. The top 3 stock allocations of this fund are HDFC Bank, Infosys, and Tata Consultancy Services.
Through a monthly SIP of ₹1,000 for 1 year, your total investment of ₹12,000 in SBI Dividend Yield Fund would become more than ₹13 thousand.
4. Tata Dividend Yield Fund
Tata Dividend Yield Fund, one of the best dividend yield funds, has an NAV of ₹19.29. The minimum SIP amount is ₹100 while the lump sum investment is ₹5,000. The fund’s alpha is 3.06 and beta is 0.97. The top 3 allocations of this fund are Bharat Electronics, HDFC Bank, and ICICI Bank.
Through a monthly SIP of ₹1,000 for 3 years, your total investment of ₹36,000 in Tata Dividend Yield Fund would become approx ₹49 thousand.
5. UTI Dividend Yield Fund
UTI Dividend Yield Fund NAV is ₹191.37. The minimum SIP amount is ₹500 while the lump sum investment is ₹5,000. The fund’s alpha is 3.72 and beta is 0.94. The top 3 stock allocations of this fund are HDFC Bank, Infosys, and Tech Mahindra.
Through a monthly SIP of ₹1,000 for 3 years, your total investment of ₹36,000 in UTI Dividend Yield Fund would become approx ₹49 thousand.
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Pros of Investing in Dividend Yield Funds
After knowing the best dividend yield funds, let’s know the benefits of investing in these mutual funds:
1. Source of Regular Income
Dividend yield funds provide a source of regular income as these funds invest in stocks that have a history of consistently paying dividends. By choosing an IDCW (Income Distribution cum capital withdrawal) plan, you can get income every week, month, or quarter as decided by the fund house.
2. Relatively Lower Risk
In the domain of equity mutual funds constituting mid cap funds and small cap funds, dividend yield mutual funds are comparatively less risky as they invest in companies that have a good track record of generating profits. These companies are less affected by market ups and downs and can also withstand the bear market.
3. Ideal for Long-term Investment
These funds are ideal for investors who have a long-term investment horizon of at least 5 years as well as a high-risk tolerance. These funds can also help retirees to get a regular income and at the same time, it helps them in earning returns on the ideal wealth.
4. High-Quality Stocks
The fund manager strategically chooses high-quality stocks and creates a diversified portfolio to reduce the overall risk. Not just equity instruments, the dividend yield funds also invest in debt and other instruments to create a risk-return balanced diversified portfolio for the investors.
Cons of Investing in Dividend Yield Funds
While there are many pros of investing in dividend yield mutual funds, there are certain cons that you need to be aware of:
1. No Fixed Income
These funds do not come with the surety of fixed income and there may be times that the fund house will not declare the dividend at all. On the other side, when the company is not making profits, then it may also have a lull period of dividends. So, dividend income is not guaranteed from both ends, underlying companies and mutual funds.
2. Lose Out on Growth Stocks
Dividend yield funds may lose out on opportunities to generate great returns from growth stocks as they invest majorly in dividend-yielding stocks. In the bull market, growth stocks can really outshine and can give better returns.
3. Taxation Rule of Dividend Yield Mutual Funds
Dividend yield funds capital gains are taxed like any other equity mutual fund. Capital gains earned within the redemption of 12 months are taxed at 20%. While the earnings made on redemption after the 12 months are taxed at 12.5% (only if the total earnings in a financial year is more than ₹1.25 lakhs).
The dividend income from mutual funds is added to the investor’s total income and is taxed accordingly as per his tax slab. If dividend income is more than ₹5,000 in a financial year, then the fund house will deduct the 10% TDS.
Conclusion
Dividend yield funds, which invest mainly in dividend-yielding stocks provide a chance to earn regular income. With the high-quality stocks selected by the fund manager, these funds are ideal for investors who want to take relatively less risk and invest for a longer time. These funds are also less volatile than other equity funds which invest in growth stocks.
But while investing in any mutual fund, it is better to do your research and keep your investment objective in mind. Open Demat account with SMC Global Securities and keep investing in stocks, or mutual funds like a pro.
Frequently Asked Questions – FAQs
1. Is the SBI dividend yield fund a good investment?
SBI Dividend Yield fund is a good investment as it has generated 22.23% returns in the last 1 year surpassing the benchmark index returns. Its expense ratio is also less than the category average making it a low-cost investment.
2. What fund has the highest dividend yield?
ICICI Dividend Yield Fund is one of the highest dividend-yielding funds that invests 94.77% of its assets in stocks.
3. Which funds give monthly dividends?
Funds that invest in stocks that have a long history of paying dividends can generally provide monthly dividends to the unit holders.
References:
https://www.smctradeonline.com/invest/mutual-funds
https://www.livemint.com/web-stories/what-are-dividend-yield-funds-11678583051061.html
Author: All Content is verified by SMC Global Securities.
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