Should you invest in Dividend Yield Funds?

When you invest directly in stocks, you can earn from both capital appreciation, i.e. rise in the stock price, and from the dividend paid by the company to its shareholders. The dividend is usually paid once a year, but sometimes a company may issue an interim dividend as well.

Mutual fund investors can get this benefit by investing in Divided Yield Funds. These are funds that predominantly invest in dividend-yielding stocks and hold 65% in equities. Since dividends are paid only when companies make a profit, Dividend Yield Funds typically invest in companies with a good track record.

Features of Dividend Yield Funds

To understand Dividend Yield Funds you must first understand dividend yield and dividend yield stocks.

• The dividend yield is calculated as the total cash dividend paid by a company divided by its market price.
• Dividend yield stocks are typically the ones declaring good dividends vis-à-vis the market price. Usually, companies that have a mature business, a good profitability track record, generate cash flows, and, in general, have a policy of paying good dividends are the ones paying generous dividends.
• Most mutual fund houses select dividend-yielding stocks by comparing their dividend with that of the benchmark index, such as the Nifty-50 or the S&P BSE Sensex.
• Much as you expect to earn capital appreciation, dividends––which is a passive income––earned during the holding period are important. Even amidst volatile market conditions, investors in such companies have earned decent dividend yields.

This has encouraged many investors to consider Dividend Yield Funds, going by the AMFI data. In January 2020 -- just before the COVID-19 pandemic -- Dividend Yield Funds had 4,75,387 folios and an AUM (Assets Under Management) of Rs 4,416 crore. As of October 2022, the folio count had increased to 5,91,982 and the AUM to Rs 10,294 crore.

Performance of Dividend Yield Funds

Like any other mutual fund, the returns of Dividend Yield Funds are based on the returns of the underlying portfolio, i.e., the companies the funds invest in. So, when the underlying portfolio holdings of Dividend Yield Funds declare good dividends, the returns of these funds are accentuated.

[Also Read: Confused by the wide range of equity mutual funds?]

Should you invest?

Yes, if you meet the following criteria:

• You want to gain exposure to dividend-paying stocks through mutual funds
• You have a high-risk appetite
• Your broader investment objective is capital appreciation
• You have an investment time of 3 to 5 years or more

If you have a long-term investment horizon, Dividend Yield Funds have the potential to reward you well for the risk you take, as long as you carefully evaluate the scheme (assessing the quantitative and qualitative parameters) -- particularly its portfolio characteristics (the fund's P/E and P/B ratios) -- before investing. In the absence of attractive yields, it is important to see how the fund is allocating its net assets. 

How to invest?

To invest, you may use the SIP (Systematic Investment Plan) route or invest a lump sum, but the former shall help you in mitigating the market risk involved with the inherent rupee-cost averaging feature while you endeavour to compound wealth. You can select a Divided Yield Fund suitable for you online. You can use Axis Bank's SIP calculator.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply