Dividend Yield Funds

Dividend yield funds are equity mutual funds that invest primarily in companies known for paying higher-than-average dividends. Fund managers select stocks that consistently distribute profits to shareholders, as this payout often reflects the company's financial stability and ability to generate steady earnings.

According to SEBI guidelines, dividend yield funds must invest at least 65% of their portfolio in dividend-paying equity and equity-related instruments. However, the fund's objective is not merely to chase dividends. It focuses specifically on dividend yield, which is the dividend pay-out expressed as a percentage of the stock's current market price. Hence, this requirement acts as a natural filter in the stock-selection process.

A dividend yield mutual fund typically invests in companies that consistently pay dividends to shareholders. Fund managers focus on firms with a history of steady or rising dividend payouts, selecting stocks that can provide regular income while potentially offering capital appreciation.

It is equally important for you to understand that high dividend-paying companies are different from those with a high dividend yield.

For example, consider two companies:

Company A has been paying a fixed dividend of ₹30 for the last three years.

Company B has paid ₹15, ₹20, and ₹25 over the same period, showing an increasing trend.

While Company A pays a higher absolute dividend, Company B has a higher dividend yield, because the yield measures the dividend as a percentage of the stock's current market price. In other words, even though the payout is lower, it is potentially growing throughout the years. That's why dividend yield companies focus on dividend yield, rather than absolute dividend.

While there are multiple mutual funds available, even dividend yield MFs can suit a certain type of investor.

Here's who can think of investing in dividend yield mutual funds:

• Conservative investors who prefer steady and reliable companies.
• Anyone looking for long-term stability.
• Investors who trust established businesses and companies that give regular dividends when they make consistent profits.
• Those who want safety and stability during uncertain market conditions.

Planning to invest in Dividend Yield Mutual Funds online?

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Here's how you can invest in Dividend Yield equity funds in 4 easy steps:

Unlike other mutual funds, there are some key factors one should know before investing in a dividend yield equity fund.

• Fund’s Yield - These funds invest in equities, so yield can fluctuate with the market.
• Dividends Are Not Assured - If companies' profits decline, they may reduce or skip dividends, which can impact the fund's returns.
• Moderate Return Potential - Dividend-paying companies are usually stable, but may move more slowly than high-growth or aggressive stocks.
• Long-Term Investment Horizon - While these are equity funds, staying invested for 3-5 years or more helps manage market ups and downs and balance the overall portfolio.

The tax rules for dividend yield mutual funds differ from those of regular equity funds. Here's how you'll be taxed if you own these funds.