Dividend Yield Funds: [Guide + Best Schemes In 2023]

“Dividend Yield Funds” Are you confused about them & want to cultivate a clear explanation? Probably, this is the reason you landed on this article.

Well, you are in the right place. Let’s explore the unique features & benefits of dividend yield funds. Additionally, we will also discuss their potential disadvantages, common doubts and top-performing dividend yield funds.

What are Dividend Yield Funds?

“Dividend Yield Funds” is made up of three words. One should understand these three words separately to get a clear explanation of dividend yield funds. So, let’s start with the first word.

Dividend- When a company decides to distribute a portion of its profits among its shareholders, the distributed amount per share is called a dividend. Some companies pay high dividends while others do not pay at all.

Related Read: What is a dividend policy?

Yield- Dividend yield refers to the percentage calculation of annual dividend payout per share. For example, if a company pays an annual dividend of ₹20 per share and its market price is ₹400 per share, its dividend yield is 5%.

Dividend Yield Funds- Dividend yield funds are a type of mutual fund that largely invests in equities of dividend-paying companies. Fund managers usually select companies that declare high dividend yields.

Types: There are two types of dividend yield funds, equity-oriented & debt-oriented dividend yield funds.

Best Dividend Yield Funds In 2023

Based on past 5-year performances, here is a list of the best-performing dividend yield funds in 2023. However, it is to be noted that past performance is not a guarantee for future success.

Features & Benefits of Dividend Yield Funds

Each type of mutual fund has its own features & benefits. Now, let’s talk about some features & benefits of dividend yield funds.

1. Lower Volatility

Dividend yield funds tend to focus on established, high dividend-paying companies. It means these companies make a good profit and are relatively less volatile.

Dividend yield funds invest 70-80% corpus in similar companies. Hence, these funds generally show lower volatility.

2. Income Generation

By investing in dividend-paying stocks, these funds provide regular dividend distributions to shareholders. Hence, these funds are suitable for income-focused investment strategies.

3. Capital Appreciation

Dividend-paying companies do not mean a lack of potential for capital appreciation. Dividend yield funds also aim to benefit from stock price appreciation over the long term.

4. Reinvestment Options

Various dividend yield funds offer reinvestment options to their investors. This option allows investors to automatically reinvest their dividend income back into the fund. This way they can leverage the potential of compounding returns over time.

Potential Disadvantages of Dividend Yield Funds

Along with attractive features, dividend yield funds bring some potential disadvantages discussed below.

1. Limited Growth

Dividend yield funds focus on dividend income over growth. Hence, they may not perform as well in terms of capital gains compared to growth-oriented funds

2. Sector Concentration Risk

Dividend yield funds may highly invest in a specific sector exposing the fund to sector concentration risk. A downturn in the sector can lead to underperformance of the fund.

Taxation

Dividend yield funds are subject to dividend income and capital gains taxes. Here are the latest tax implications on dividend yield funds.

A. Dividend Income Taxes: Dividend income is now subject to tax in the hands of investors as regular income and taxed according to applicable income tax slab rates.

B. Short-Term Capital Gains (STCGs): If you sell your investments before the holding period of one year, a tax of 15% will be deducted on gains on investments.

C. Long-Term Capital Gains (LTCGs): If you sell your investments after the holding period of one year, an LTCG of up to 1 lakh is tax-free. Over this amount, a tax of 10% will be deducted from gains on investments.

D. Tax Deducted At Source (TDS): If total dividend income exceeds ₹5000, the mutual fund is required to deduct TDS at the rate of 10% before distributing the dividends to the investor. The taxpayer can claim a credit for the TDS deducted from their income while filing the Income Tax Return.

Points To Consider Before Investing

Investors should consider some important points before investing in dividend yield funds.

1. Investment Objective
2. Risk Tolerance Level
3. Time Horizon of Investment
4. Asset Management Company & Its Reputation
5. Fund Selection
6. Dividend Payout Consistency
7. Fund Manager’s Experience & Expertise
8. Associated Risks
9. Past Performance
10. Costs & Expense Ratios
11. Liquidity

Related Read: Guide to Choose a mutual fund

How To Invest In An Index Fund

Thanks to online investing platforms that made investing easy. Investing in a dividend yield fund is only a few steps away.

1. Register with any reputed online investment platform
2. Open an account & complete KYC
3. Research & select fund
4. Choose the mode of investment i.e. lumpsum or SIP Investment
5. Make the payment
6. Review the performance periodically

Final Words

This article is only for educational purposes & should not be considered investment advice. Readers should use their own intellect before making any financial decision.

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