Get the most out of dividend-yield funds

Companies often distribute a portion of their profits to shareholders in the form of dividends. If a company is paying dividends, it means that its results are likely to be good and its financial position is strong. Although it is not necessary for every company to pay dividends, companies do so in the interest of both the company and its investors. Companies also give dividends to shareholders because they consider investors to be an important part of their business. You do not receive benefits like dividends in any other investment.

Low-risk investors
Most investors prefer to invest in shares that have a history of consistently paying good dividends. However, it should be noted that investors who prefer lower risk do not want to invest directly in shares. What should such investors do if they want to take advantage of dividend-paying shares? For such investors, dividend yield funds can be a good option. First, let’s understand what dividend yield funds are and how they work. Dividends play a significant role in most investors’ decisions to purchase shares, so dividend yield funds choose companies with good cash flow, strong balance sheets, and a regular distribution of dividends to shareholders, and invest in them.

As per the mandate of the Securities and Exchange Board of India (SEBI), any dividend yield fund scheme must have a minimum investment at least 65% in dividend yielding shares. Investing more than 65% in shares means that they come under equity funds. For most such funds, the Nifty Dividend Opportunities 50 Index is considered the benchmark. Fund houses select shares paying higher dividends, based on this index.

Investment norm
Dividend yield funds generally invest around 70-80% of their capital in high dividend yield or payout shares. Ratio of dividend payments and market capital of the company.

For example, suppose the price of a share is Rs. 500 and the company has given a dividend of Rs. 10 per share, then its dividend yield will be 2%. The ratio of a company’s total income to its total dividend amount is called the dividend payout ratio. Dividend yield funds provide investors with the opportunity to diversify their investments and participate in different segments of the market.

Now let’s see what kind of return dividend yield funds have given. According to Value Research data, dividend yield funds have given an average return of 9.10% in the last one year, 29% in three years, and 11% in five years.

Tax provision
Dividend yield funds come under equity mutual funds, so they are taxed similar to equity mutual funds. If you redeem a unit of an equity fund within one year of buying it, you will have to pay short-term capital gains tax. If you fall under any income tax bracket, you will have to pay tax on this gain at a uniform rate of 15%. Similarly, the gain that you get on selling a unit of an equity fund after one year is called long-term capital gains. Such gains up to one lakh rupees are completely tax-free. However, gains above one lakh rupees are taxed at the rate of 10% as LTCG tax.

So, for whom are these funds right for and should you invest in them? Dividend yield funds are less risky compared to small-cap, mid-cap, and growth-oriented funds, making them suitable for investors who want to take a moderate level of risk. These funds experience less volatility compared to other equity funds.

Less risky
Dividend yield funds are a good option for investors who do not want to be impacted by market fluctuations. The companies these funds invest in are usually stable and have less volatility. In other words, these funds are suitable for investors who are not very aggressive, as such companies are usually stable.

Investors should keep in mind that dividend yield funds are also equity funds. It is true that they do not experience the same volatility as thematic funds, but they are still affected by market fluctuations. Look for funds with good-sized portfolios, low expense ratios, and less volatility. Overall, it can be said that investors who want good returns with low risk can choose dividend yield funds.