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Should you invest in Dividend Yield Funds? Research Team | Posted On Thursday, April 28,2016, 06:51 PM

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Should you invest in Dividend Yield Funds?



You love investing in stocks. Gambling is in your blood. There is nothing like making a profit in the stock market. But there is a problem….. Investing in stocks gives good returns, but also with its share of risks. Yes, investing in the stock market can be very risky. Wouldn’t it be great if your investments in the stock market were protected? Imagine the stock market crashing all around you, but your portfolio safe? Is this possible….

Yes… You can protect your portfolio with dividend yield funds.

What are Dividend Yield Funds?

Dividend Yield Funds are a class of defensive equity funds. You invest your money in dividend yield funds. The fund manager of these dividend yield funds, invest 65% to 80% of your money in a corpus of stocks (collection of stocks), which give high dividends (a good dividend yield). How do you calculate the dividend yield of a stock? Simple… Divide the dividend offered per share by the current market price of the share.  The fund manager targets stocks, which give a higher dividend yield than the market (say the Nifty) and invests your money in them.

Why should you invest in Dividend Yield Funds?

You invest your money in a dividend yield fund. The fund manager then takes this money and invests it in Companies, which are stable and have regular income. Good FMCG Companies are an example. These Companies pay a regular dividend and at a steady rate. Stocks which pay good dividends continue to pay dividends, even when stock markets are not doing too well. Dividend yield funds invest your money in such Companies, which give a good dividend yield.

Your investment in a dividend yield fund is safer when compared to an investment in an equity diversified fund, which invests your money in growth stocks. Growth stocks are very good in a rising market (bull market), but crash badly during times of recession (when stock markets crash). Stocks which pay good dividends do not fall much in price, when stock markets crash. They maintain a consistent price level even in a falling market.

Dividend yield funds have performed better than their benchmarks (say the Nifty), over the long term. These dividend yield funds are an excellent investment tool, if you plan to stay invested in them for the long term (say 3 to 5 years). If you are a conservative investor, then you must definitely consider an investment in dividend yield funds.

See also: What is Primary Market?

Things you need to be careful of while investing in Dividend Yield Funds

Growth stocks outperform dividend yield funds in a bull market

Think of this scenario… The stock markets are in a bull run (rising rapidly). Equity diversified mutual funds which invest heavily in growth stocks, are shooting up. Your friends who have invested in equit, are making a lot of money. You have invested your money in a dividend yield fund, which invests heavily in defensive stocks like Pharma and FMCG. Defensive stocks do not rise as fast as growth stocks in a bull market. In these difficult times you must not panic. When stock markets crash, you’re the boss.

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Check the exposure of the Dividend Yield Funds

You need to check if your dividend yield fund has an exposure to small and mid cap stocks. If your dividend yield fund has a huge exposure to small and mid cap stocks, they would be as risky and volatile as an equity diversified mutual fund. Dividend Yield Funds should have a huge exposure to good large cap stocks, so that they can be considered safe.

See Also: Stock Exchanges In India

Who should invest?

If you are a conservative investor who wants to invest in equity, you must consider an investment in dividend yield funds.

Safety with growth….that too in equity…What better way to invest than in Dividend Yield Funds.

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