Deciding which category of mutual funds to invest in can be tricky especially when there is a number of options available.
But if you are someone who is looking for stable growth and unwilling to take too much risk at once, then high-dividend-yielding mutual funds are the category you should definitely have a look at!
What is High Dividend Yield Mutual Funds?
Before getting into what is high dividend yield mutual fund, let us first understand what dividend yield actually means. Companies distribute their profits to the shareholders by way of dividends.
So, if I were to invest in any company, I need to know how much return I would generate if I invest today. That’s exactly what dividend yield is.
It is nothing but a dividend paid per share as a percentage of the current market price of the share. High dividend yield mutual funds are basically funds that are looking to invest in those companies well known for such high dividend yield.
The objective of these funds is to predominantly invest in dividend-yielding stocks and generate regular income for its investors. Hence these are also known as Income Funds.
These are open-ended equity funds which mean they are compulsorily required to invest a minimum of 65% of the total assets in equity.
And generally, fund managers prefer those companies that have relatively stable earnings and higher dividend payout.
Benefits of Investing in Dividend Yield Funds
- Investing in Companies that generate profits: Since dividends can be paid only if the company has earned distributable profits, these schemes invest only in such companies that have a good track record of generating high profits and distributing them. Also, generally but not compulsorily, these are the large companies that pay consistent dividends such as ITC, HUL, Infosys, etc.
- Regular Income: Investors can get steady income flows by investing in Dividend Yield Funds as companies generally maintain their range of dividend payments.
- Capital Appreciation: While primarily the fund is focused on high dividend yield stocks providing regular income, it also has the potential for capital appreciation.
- Reduced Volatility: Since the funds are invested in companies that generate high and consistent profits, the prices of the shares are relatively less volatile as compared to growth stocks and hence Dividend Yield Funds provide a good option to reduce the volatility of your portfolio.
Risks or Limitations of Dividend Yield Mutual Funds
- Limited Capital Appreciation: Since the funds are invested in companies that give higher dividends, there is a limited scope of capital appreciation as compared to funds that invest in growth stocks.
- Taxation of Dividend: Currently the dividend is taxed in the hands of investors but if in the future the same is taxed in the hands of companies then the returns of the Dividend Yield Funds would be impacted as companies would be reluctant to pay dividends.
- Market Risk: Like all mutual fund investments, dividend yield mutual funds are subject to market risk.
Who should invest?
Considering the structure, benefits, and risks of the Dividend Yield Funds, it can be said that a person who is looking for steady income flows with limited growth potential and who does not want to take risks aggressively by investing in small companies such as pensioners or retired people can consider these funds.
List of High Dividend Yield Mutual Funds
Following is the list of Dividend Yield Funds in India
