What Is Dividend Yield Fund? Why Should You Invest in It?

What Is Dividend Yield Fund?

Certain mutual funds offer high returns to investors in the form of a dividend payment from the shares. Thus dividend yield funds are the funds that mainly invest its corpus in stocks that have a high dividend yield higher than the average dividend yield of the market. These funds are known to invest in corporations that have significantly high dividend-yielding stocks, Thereby enabling the investors to get the maximum returns on their investments.

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See Also: Everything You Need To Know About Mutual Funds

Things to Know While Investing in Dividend Yield Fund:

Here are some of the things you should consider while investing in Dividend Yield Fund:

•  A high dividend payout often means the company has left its best growth years behind and have very few opportunities to grow.
• Check for the consistency of the funds before making an investment in these stocks. This will allow you to understand how the fund has been performing in the past and what will be the possible outcomes in future.
• Dividend payments are liable to be taxed. A dividend payment attracts dividend distribution tax which is taxable at the hands of the investors as per their applicable tax slabs.
• The dividend funds are likely to underperform when compared to the growth funds when the market follows a bullish trend.
• Payment of dividend is not guaranteed and depends mainly on the profits made by the company. Thus they cannot be considered as a fixed income generating instrument.

See Also: How Mutual Funds Work?

Who Should Invest in Dividend Yield Fund?

Here is a list of investors who can invest in dividend yield fund:

Investors with a low risk-appetite: Dividend yield funds are best suited for investors who are averse to risk and prefer to stay on the safer side rather than exposing the investments to market risk.

First-time investors: If you are a beginner and have recently entered the share market, then you may consider investing in dividend yield funds as these funds are known to carry minimal risk.

If you want to diversify your investment portfolio: The dividend yield funds enable you to make an all-round investment and assess risk on a large scale, thereby assessing the potential investor in owning a diversified portfolio.

If you want to invest for a short horizon: Investors who want to invest for a short time period can invest in these funds. Investors can start gaining returns on such investments within a short time through dividend payments.

If you are looking for investment options for regular income: investors looking to establish a source of side income may consider investing in dividend yield funds as they can help you earn dividend payouts.

See Also: Which Type of Mutual Fund Is Best to Invest?

Dividend Yield Fund Returns:

Dividend funds mainly invest in the stocks of organisations that offer dividends. Thus dividends are the profits made by the company which are then distributed among the shareholders of the company. The returns are nothing but the yield on the funds. Depending on the funds, the fund manager can either declare a dividend or use the profits to reinvest in the portfolio.

Advantages of Dividend Yield Fund:

Let’s discuss how dividend yield fund can benefit you:

• A high dividend payment can ensure steady cash flow and a regular dividend income.
• Dividend funds allow the minimization of the market volatility risk and hedges against market turmoil
• The funds are suitable for investors with moderate risk appetite as the investments in dividend funds carry a marginal level of risk.
• These funds are issued by organisations that have a proven record; they ensure high returns in the future.
• In the long-run, these funds give better yield on investments as the fund managers only include bluechip stocks in the portfolio. This is because these funds have an excellent financial track record and have performed consistently well in the past.

See Also: Mutual Funds with High Returns

Risks of Investing in Dividend Yield Fund:

• Sometimes the stock price of the dividend-paying company may be small while the dividend payout may be high. This happens due to the fact that when the dividend is paid to the investors the price of the stock reduces.
• Though the volatility of the dividend yield funds is lower than that of the categories of both diverse funds and large-cap funds, they carry a certain amount of risk. Investors should access these risks before investing.

Top 5 Dividend Yield Fund 2020:

• Templeton India Equity Income Fund
• Principal Dividend Yield Fund
• UTI Dividend Yield Fund
• ICICI Prudential Dividend Yield Fund
• Aditya Birla Sun Life Dividend Yield Fund

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