Top Dividend Yield Funds: Should You Invest in Them?

Top Dividend Yield Funds: Introduction

In the stock market space, dividend yield funds are the kind of mutual funds that prioritize investing in companies or businesses that have huge potential for providing regular dividend payouts. As characterized by the Securities and Exchange Board of India (SEBI), a dividend yield fund is one that invests at least 65% of the complete portfolio in various dividend-yielding instruments.

Further, dividend yield mutual funds are classified on the basis of the equity exposure of funds. Suppose, if the fund possesses an equity exposure higher than 65%, then it will be categorized as a dividend-yielding equity fund. If that is not the case, then the fund will be tagged as a dividend-yielding debt fund.

Dividend Yield Funds: What are they?

The prime objective of the dividend yield funds is to provide investors with dividends regularly. This usually happens when the fund managers by investing largely in the securities of companies with huge potential are able to offer regular payouts. However, these dividends are strictly subject to market performance and hence cannot be guaranteed on a regular basis.

The classification of mutual funds into names implies the strategy that a particular fund manager adopts rather than the actual market performance of these funds. The fund manager with his team of researchers and analysts streamlines only those companies that align with the broad objectives of the fund.

Should You Invest in Dividend Yield Funds?

If you are still looking for an answer to whether you should or shouldn’t invest in dividend yield funds, this is the section that will help you arrive at a proper conclusion. Investors who are looking to arrange a regular income for themselves should consider the option of investing in dividend yield funds. Although the dividends that are yielded by this category of mutual funds may not be wholesome, no income can be ignored in the times we are living in.

However, as mentioned above, the dividend payout is not guaranteed on a regular basis due to its dependence entirely on the market performance of the underlying businesses, companies, and the overall market movements. These funds are an ideal choice, especially for first-time equity investors. 

This is because of the fact that the underlying companies that the fund managers invest in are reputed for their stability and ease of sailing through troubled waters in the highly volatile stock market scenario. The fund managers usually choose such companies that are able to provide dividend payouts despite stock market lows and price depreciation due to other reasons.

Taxation Procedure of Dividend Yield Funds

Taxation procedures have changed after amendments were passed in the Union Budget 2020. Accordingly, dividends that are offered by mutual funds are currently taxed in the hands of investors aligning with the income tax slab category they fall under. The tax rate of capital gains that are offered by these funds is dependent on the holding period as well as the category of equity exposure.

If the equity exposure is found to be higher than 65%, then the taxation rules of equity funds will apply. If that isn’t the case, then the taxation rules of debt funds will apply. Therefore, before investing you must be quite mindful of the equity exposure for reaping the best yields. This will also contribute to planning your taxes in a better way.

Benefits of Dividend Yield Funds

Listed below are the most significant benefits of dividend yield mutual funds:

• Dividend yield mutual funds comprise of the huge potential of offering regular dividends
• Most often, the underlying companies of the funds are capable of sailing through volatile markets comfortably
• Companies that fund managers invest in for receiving dividend yield funds are usually unaffected by stock market prices and fluctuations
• These funds are power-packed with the high yield on investments in the future
• These funds are ideal for investment for first-time investors

Comparison between Dividend Option & Dividend Yield Fund

It is vital that investors should not confuse between a dividend yield fund and the dividend option of a mutual fund. Usually, mutual funds offer two alternatives to investors for receiving their returns – 

• Growth option
• Dividend option

Growth option – This happens when the value of the investor’s holdings increases while the fund makes profits after selling its holdings.

Dividend Option – In this case, the investors receive these gains of dividend payouts on a regular basis from the mutual fund.

A dividend yield fund, different from the above, specifically targets some stocks and investments forming dividend payout from companies as their core objective. A dividend yield mutual fund also has growth and dividend options.

Things to Consider Before You Invest in Dividend Yield Mutual Funds

Irrespective of its benefits or profits, investors should always conduct thorough research on the past performances of funds before investing in them.  Some other factors they must consider before investing in dividend yield funds are the following:

Risk Tolerance

If you are a conventional investor who gives precedence to adding stability in your portfolio, then you must look for funds that reserve more allocation to large-cap stocks. This is because your prime objective is risk tolerance by investing in a scheme that has low risks associated. However, if you want to invest in a scheme having a higher amount of small-cap stocks or mid-cap stocks, then your entire purpose of investment goes down the drain.

Fund Tenures

Like other mutual funds, it is crucial to consider the time period for which the fund is existing. A dividend yield fund that has witnessed the bull and bear phases of the stock market will offer a better return in comparison to newer companies. Also, newly launched companies advertising funds might record great performances when markets are high, but to ensure long-term gains the investor must overview the fund’s tenure and performances in various market cycles.

No Small Corpus Funds

Financial experts always recommended that when investing in dividend yield funds, investors should avoid schemes that have a small corpus because a small mistake in strategizing can plunge the numbers to rock bottom. Therefore, investors should choose funds having a reasonable corpus size, low volatility, and low expense ratio.

List of dividend yield mutual funds you can invest in 2022

Find out the dividend yield mutual fund you can invest in for a long time from the table below:

(Data as of 25 November 2022)

Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns.
 

Important things to remember:

1. Do Not Blindly Follow Hot Tips

No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly. 

2. Eliminate Loser Stocks from Portfolio 

There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses. 

3. Don't Exceed Your Investment Budget Abruptly 

While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares. 

Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns