Why Investors Should Consider Dividend Yield Funds? Key Benefits Explained
For first-time investors looking into various mutual fund schemes, the options are confusing. Ranging from large-cap funds to value funds and ELSS to thematic funds, each type has its pros and cons. Of these, dividend yield funds are particularly interesting for those who seek regular returns as well as wealth appreciation.
What Are Dividend Yield Funds?
Dividend yield funds are mutual funds that invest mostly in shares of those companies that issue regular dividends. According to the classification by SEBI, the funds should have at least 65% of their portfolio in such shares. These funds allow investors to get both the opportunity of appreciation of wealth and constant income in terms of dividend disbursements. They are more appropriate for retired people and passive income seekers.
These funds come under a unique category of equity mutual funds; other categories include value funds, contra funds, focused funds, sectoral/thematic funds, and ELSS.
How Popular Are These Funds?
Dividend yield funds are not very popular compared to some other mutual fund schemes. At present, there are just 10 dividend-yield mutual fund schemes in the market, with gross assets under management (AUM) worth Rs. 31,049 crore as on January 31, 2025, based on data by AMFI.
To put this into perspective, sectoral funds have 205 schemes with an AUM of Rs. 4.60 lakh crore, value funds have 23 schemes managing Rs.1.83 lakh crore, and ELSS funds include 43 schemes with Rs.2.32 lakh crore in assets.
Key Advantages of Investing in Dividend Yield Funds
1. Regular Income: These investments are in the form of those companies that pay dividends on a regular basis so that the investor gets a consistent income.
2. Less Volatility: The shares in these funds generally have lower fluctuations in prices than growth stocks and hence are appropriate for conservative investors.
Top-Performing Dividend Yield Funds
According to three-year returns, the top-performing dividend yield mutual funds are:
- ICICI Prudential Dividend Yield Equity Fund: 21.37% return, Rs.4,642 crore AUM
- Aditya Birla Sun Life Dividend Yield Fund: 18.74% return, Rs.1,367 crore AUM
- HDFC Dividend Yield Fund: 17.35% return, Rs.5,612 crore AUM
- Templeton India Equity Income Fund: 17.33% return, Rs.2,242 crore AUM
Do These Funds Have Limited Growth Potential?
With regard to value funds and other growth-oriented funds that have a high growth potential, dividend yield funds provide relatively smaller returns. This is because the earnings are shared as dividends and not reinvested for accelerated growth. In addition, they might not benefit as much during a strong bull market. Still, they prove to be consistent because of the sound financials of the firms in which the funds are invested. At times of declining interest rates, they can provide higher returns. Investors seeking a balance between stability and income can include dividend-yield funds in their portfolio. Although they might not provide the highest growth, they give a stable income stream and are less volatile.
