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Dividend yield mutual funds offer a balanced approach combining equity growth potential with income stability from dividend payouts. This guide explains how they work and their suitability for your portfolio.

Understanding Dividend Yield Mutual Funds

Dividend yield mutual funds invest primarily in dividend-paying stocks. SEBI requires 65% minimum equity allocation. They differ from other equity funds through their income-focused strategy.

What is Dividend Yield?

Dividend Yield = (Annual Dividend per Share ÷ Market Price per Share) × 100

Example: Rs. 10 dividend on Rs. 200 stock = 5% yield. These funds focus on attractive yields relative to stock price, not just absolute dividend amounts.

How Do Dividend Yield Mutual Funds Work?

Stock Selection: Fund managers screen for historical dividend track record, yield vs. benchmark, financial stability, and business fundamentals.

Portfolio: 70-80% in high-dividend-yield stocks; remainder in other equities or cash.

Income Sources:

1. Dividends from portfolio companies

2. Capital appreciation from stock price increases

This dual approach offers both income and growth potential.

Key Features

1. Focus on Established Companies: Invest in mature large-cap/mid-cap companies (banking, FMCG, utilities, pharma) with strong balance sheets.

2. Lower Volatility: Financially stable companies exhibit lower volatility, offering resilience during downturns.

3. Regular Income Potential: Dividends provide potential income, though not guaranteed.

4. Diversification: Invest across sectors with a tilt toward consistent dividend payers.

Who Should Consider These Funds?

Conservative Equity Investors: Want equity exposure with lower volatility – a middle ground between debt and growth equities.

Long-Term Investors: 3-5+ year horizon to benefit from dividend yield strategy.

Income-Seeking Investors: Looking for potential regular income with capital appreciation (not guaranteed).

Near-Retirees: Want reduced volatility while maintaining equity exposure.

Advantages

Steady Returns: Dividend-paying companies have stable earnings, offering predictable performance.

Defensive Nature: More resilient during market volatility; dividend income cushions value fluctuations.

Compounding: Growth option reinvests dividends automatically, enhancing long-term returns.

Inflation Protection: Growing dividends help combat inflation, unlike fixed-income instruments.

Risks

Market Risk: Subject to volatility; stock prices can fall despite dividends, causing potential losses.

Dividend Reduction: Companies may cut dividends during tough times, impacting fund income and NAV.

Limited Growth: Lower capital appreciation vs. growth funds; may miss high-growth opportunities.

Sector Concentration: Higher exposure to specific sectors (utilities, banking, FMCG) increases sector-specific risk.

Tax Treatment

As equity-oriented funds, they follow equity tax rules:

LTCG (>12 months): 12.5% tax; first Rs. 1.25 lakh exempt per year.

STCG (≤12 months): 20% tax.

Dividends received by the fund are reflected in NAV, not separately taxed. Consult a tax professional for personalized advice.

How to Invest in Dividend Yield Mutual Funds

Investing in dividend yield mutual funds follows the same process as other mutual funds:

1. Complete Your KYC:

Ensure you’ve completed the one-time KYC (Know Your Customer) process, which is mandatory for all mutual fund investments in India.

2. Choose Your Investment Mode:

You can invest through:

– Online platforms like Curie Money‘s partner portals

– Direct applications to the fund house

– Through registered mutual fund distributors

3. Decide on Investment Approach:

– Lump Sum: Invest a single amount at once

– SIP (Systematic Investment Plan): Invest regular amounts monthly or quarterly

SIPs can be particularly effective with dividend yield funds, allowing you to build your investment gradually while benefiting from rupee cost averaging.

Dividend Yield Funds vs. Dividend Option

Dividend Yield Fund : A dividend yield fund is a type of equity mutual fund that specifically invests in companies known for paying regular, high dividends – typically blue-chip stocks in sectors like banking, FMCG, utilities, and PSUs. The fund’s strategy focuses on stocks with dividend yields of 3-6%, higher than the market average. These funds aim to generate returns from both the dividends received from portfolio companies AND capital appreciation of stock prices. Examples include ICICI Prudential Dividend Yield Equity Fund and HDFC Dividend Yield Fund.

 Dividend Option : The dividend option is a payout structure available in ANY mutual fund (not just dividend yield funds). When you invest in any fund, you can choose between two modes: Growth Option(all returns stay invested and reflected in NAV growth) or Dividend Option (fund periodically pays out profits to you, which reduces NAV proportionally). These payouts are not guaranteed or regular; they’re declared at the fund’s discretion. Importantly, when you receive a dividend payout, it’s essentially your own money being returned to you, not “extra”  income.

Performance Considerations

Historically, dividend yield funds underperform growth funds in bull markets but show better resilience during corrections. Over 10+ years, dividends contribute 30-40% of stock returns. Past performance doesn’t guarantee future results.

Building a Balanced Portfolio

Use dividend yield funds as part of diversified strategy:

– Young investors: For stability with growth funds

– Middle-aged: Larger equity portion approaching retirement

– Near-retirees: Reduce volatility while keeping equity exposure

Choosing the Right Fund

Consider: track record across cycles, portfolio composition, expense ratio, fund manager experience, and fund size.

If you don’t wish to put in the effort of selecting the funds and would only like to invest for a short period of time to essentially earn some returns on your otherwise lying funds, then parking your money in Curie Money makes so much sense! Curie Money invests the money in liquid funds which can be redeemed almost instantaneously!

Conclusion

Dividend yield funds balance equity growth with dividend-paying stock stability. Suitable for investors prioritizing lower volatility and income with appreciation. Not one-size-fits-all-work best in diversified portfolios aligned with your goals and risk profile.

At Curie Money (AMFI ARN: 257706), we partner with ICICI Prudential and Bajaj Finserv for diverse mutual fund access. Assess your needs and consult a financial advisor for personalized guidance.

Disclaimer: 

Mutual fund investments are subject to market risks. Read all scheme documents carefully. Past performance doesn’t indicate future results. Information is educational only, not investment advice. Dividends aren’t guaranteed. Consider your objectives, risk tolerance, and financial situation before investing.