Dividend Yield Mutual Funds – Concept, Investment Idea, Types, Features, Features & more

One of the most critical aspects that investors look forward to when Dividend Yield Mutual Funds comes to investing in equity and equity related investments is a dividend.

Ideally, companies share profit by declaring dividends to their shareholders. A few companies pay a considerable amount of dividends, while some companies don’t have any dividends. 

Above all, it is not compulsory for companies to declare dividends, but few companies offer dividends to attract investors. 

When you hear the term dividend mutual funds, then it is quite a common assumption that these funds are the ones that pay some regular dividends. 

Well, you aren’t wrong completely, as some mutual funds return to their investors by offering dividends. Basically, these are funds that choose to invest in companies that provide high yielding stocks. 

Above all, these funds allow managers to get the most out of their investment. 

At times, mutual fund investors choose to invest in funds which offer incomes in terms of dividend so they can meet their expenses. 

In reality, you can say that a dividend yield fund doesn’t require you to pay dividends. It is all about the strategy of the fund, and it is way more than just giving out dividends. 

About Dividend Yield Mutual Fund

Ideally, the dividend yield is the yield that the company pays per unit by dividing the market price.

In simple terms, the dividend yield mutual funds are a type of equity funds that choose to invest in equity and equity-related tools. 

These companies pay higher dividends, but a company can only pay dividends if it makes profits.

So, fund managers choose the majority of the companies which are inclined towards profit making and have a fantastic track record. 

Generally, under the dividend yield fund, a majority amount of the corpus money goes to stocks that yield a higher return than that of the current market. 

Above all, the dividend is like a filter that helps the fund manager to select some securities. The companies which choose to pay dividends most likely feature exceptional cash flows. 

These companies are relatively stable in comparison to other stocks. Besides the dividend element, investors need to know that high dividend yield is an essential criterion. 

In simple terms, we can say that if the company is paying a generous dividend, but the price of the stock is relatively high, then the dividend is low. 

If that is the case, then the fund manager can skip the investment part. Additionally, the fund manager must also consider other growth factors before investing in the fund. 

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Basics of Dividend Yield Mutual Funds

Before digging deep into what is dividend yield fund, let’s learn about some basics like a dividend. 

Ideally, the dividend yield is the ratio of the dividend paid in the past to the current market price of the stock. 

In the payout, both full and partial dividends are there. No doubt, a stock pays a dividend every year, but the price of the stock might be high then. 

You can say that the dividend yield comes into the picture to assure that the asking price of the dividend is not too high. 

When you invest in a dividend yield fund, then you must know that the fund manager puts most of the corpus amount into stocks that have high dividend yields. 

You need to understand the two parts, basically. Firstly, the fund doesn’t put the complete corpus into stocks that pay good dividends.

Some part of the canon also goes to stocks where there is some growth potential. The high yield of dividends is most likely to vary from fund to fund.

It is mainly because the dividend goes when dividend payments are out, and the price of securities also falls. 

Above all, it is essential to look forward to seeing the number of securities for investment.

But a fund might wind up keeping up with high dividend yield security mainly because it is more than the average. Additionally, it might just not pay dividends. 

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What are Dividend Yield Funds?

In simple terms, we can say that a dividend mutual fund mainly invests in companies that can pay dividends. 

Dividends are a type of profit that companies pay to their shareholders. Companies earn this profit by selling their stocks at higher prices as compared to the purchase price. 

Basically, the asset management company includes this profit in the net asset value.

On the flip side, the asset management company just can’t count the unrealized profits from the tools when it comes to paying dividends. 

But at times, these companies declare dividends, which are a part of unrealized gains. Above all, the fund managers decide all this. 

As per the scheme, these managers also have the option to buy back the securities or debts by sending money back. 

Dividend Yield Mutual Funds vs Dividend Options

As an investor, you must not confuse the dividend yield mutual funds and dividend options. The majority of the mutual funds offer two options of a mutual fund. 

Growth Option

Under this category, when the fund earns profits on selling its holdings, then it’s value increases. 

Dividend Option

Under this category, the investors receive profits as dividends from the mutual fund. 

The best part about dividend yield mutual funds is that it focuses on some individual stocks and investments. Furthermore, the central theme here is dividend payout. 

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Types of Dividend Yield Mutual Funds

Here are various types of Dividend Yield Mutual Funds –

Equity Dividend Yield Mutual Funds

The dividend mutual fund is equity-based if the company aims to invest at least 65% of the corpus amount in the equity class. Additionally, these funds are quite volatile. 

Debt Dividend-Yielding Mutual Funds

The dividend mutual fund is debt-based if the company aims to invest at least 65% of the corpus amount in debt class.

These funds are way different than equity dividend-yielding mutual funds as they aren’t volatile and are also stable.

Debt-based companies pay a dividend from funds by trading in bonds or earning some interest on bonds. 

Features of Dividend Yield Mutual Funds

• These funds invest a significant portion of the corpus into dividend-yielding securities. In simple terms, it implies that companies that invest in these stocks can pay an above-average dividend. 
• As per SEBI guidelines, these funds invest at least 65% of their assets into stocks, which yields dividends. 
• Basically, dividend-yielding mutual funds tend to invest usually in those companies which distribute a significant part of their profits to the investors. Governments mainly own these companies, and only a few are owned by the private sector. To maximize the value of shareholders, these companies tend to regularly payback to the stakeholders in dividend form.
• Additionally, companies also have an option to reinvest the net profit or to distribute the profit among the shareholders. 
• The profits are paid only in the form of dividends booked by the mutual fund. 

Know about Dividend Reinvestment and Dividend Sweep Strategy

Mutual funds also provide dividend reinvestment and dividend sweep options. Under the reinvestment strategy, the dividend earned is put back into the same mutual fund. 

For instance, you hold 100 units of a fund that offers a dividend of Rs.5 per unit. You can reinvest the same amount of Rs.500 instantly under the dividend reinvestment value. 

But you need to know that you can use Rs.500 to buy different units of the mutual fund scheme. The best part about these strategies is that they are highly tax efficient. 

It is mainly because tax deduction happens every time when the company pays the dividend under these strategies. 

On the other hand, the growth option under mutual fund also invests the same money in the fund. But no tax is incurred on investment as such, and thankfully the value of NAV increases quickly. 

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Who should invest in Dividend Yield Mutual Funds?

As you know by now that dividend yield mutual funds are a part of equity funds, which concentrate only on the dividend yield of securities. 

As these companies are relatively stable, so investors with a less risk-taking appetite can invest here. 

These funds aren’t ideal for investors who choose aggressive growth, but they are suitable for including in the investment portfolios.

Low Risk-taking Appetite – Mainly, the dividend yield mutual funds are excellent for investors who are not willing to take many risks. These investors can let go of the profit instead of exposing themselves to risks prevailing in the market. 

New to the market – If you are a first-time investor, then you must invest in dividend yield mutual funds. It is mainly because these funds are less volatile.

Diversification – On a large scale, the dividend yield mutual funds allow investors to invest all around. After assessing the potential investor, the fund manager invests the corpus amount in the portfolio.

Short-term Investment – The fund is ideal for investors who have a short-term investment horizon as the fund claims to offer excellent returns in the short term.

Regular Income – If you are an investor looking forward to earning a steady income, even if the amount isn’t that great, then this fund is just for you. 

Things to consider before Investing in Dividend Yield Mutual Funds

Experts suggest that before investing in any fund, investors must look into the past performance of the fund. Some of the factors to consider are also here:

Invest as per your risk-taking appetite

For example, if you are a conservative investor who looks forward to having some stability in the portfolio.

Then you must invest in funds that allocate the majority of the corpus amount in the large-cap stocks because you want low risk.

You will end up defeating your goal purpose if you invest in funds that invest more in small and midcap stocks.

Investment Horizon

Just like the majority of the funds, it is essential at the investment period while investing in these funds.

You must look forward to investing in dividend yield mutual funds, which works well in both bull and bear markets.

If the markets are doing good, then you can see even the new entrant funds are doing well.

Above all, before investing in funds, you must consider the tenure and look at the performance of the fund in different market phases.

Don’t go for Small Corpus Funds

The majority of the experts say that investors must avoid small corpus funds when it comes to investing in dividend yield funds.

It is mainly because if the investment strategy is right, then it can make any fund look amazing.

Above all, investors need to look for funds that have an adequate size of the corpus, low volatility, and minimum expense ratio.

Taxation on Dividend Yield Mutual Funds

10% Dividend distribution tax is applicable to funds that pay dividends. The tax is deductible when the company pays the dividend, so it isn’t taxable in the hands of investors.

25% of Dividend distribution tax is applicable on non -equity funds, including money market instruments and debt funds. 

No doubt, the dividends are tax-free in the hands of investors, but if the rate of taxation is too high, then funds are tax-inefficient.

Dividend Yield Mutual Fund – Conclusion

Usually, the dividend yield funds follow the standard parameters of filtering the securities.

Investors are not advisable to select high dividend-paying stocks blindly as they might end up buying low stocks. 

Besides dividends, investors must also consider growth and fundamentals. You can invest in dividend yield funds by the online or offline portal.

All you need is some mandatory KYC documents.

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