What are Dividend Yield Funds

Do you know why some mutual fund advisors recommend dividend yield funds for their investors? Many conservative investors will be very happy when they receive dividends for their investments. Dividend yield funds are a great way to bring stability to their investment portfolio. Around 65% of their equity portfolio invests in the stocks of blue-chip companies that offer high dividends. Dividend Yield Funds are certainly a good addition to your investment portfolio, but it is not suitable for those who seek aggressive growth in their investment.

What are dividend yield funds?

Mutual funds are a great investment choice to build wealth, and some mutual funds offer high returns to their investors. Dividend Yield Funds are among them as it offers returns in the form of dividends by the shares. These mutual fund schemes mainly invest in the stocks of such companies that are known to pay good dividends consistently.

As per the Mutual Fund categorization rules of the Securities and Exchange Board of India, a Dividend Yield Fund is an open-ended equity scheme investing mainly in dividend yield stocks of blue-chip companies. At least 65% of the total exposure of this scheme should be invested in equity or equity-related instruments like stocks. And the remaining portion invests in money-market instruments or debt securities.

How dividend yield calculates?

If you choose dividend yield funds to invest your money, you invest approximately 70-80% of the corpus in shares or stocks of companies that can yield higher returns than the market. Those companies which can pay high dividends to their investors have great cash flows. Besides, these companies are more stable than other stocks.

If you plan to invest in dividend yield mutual funds, get an idea about its dividend yield calculation. Divide the dividend per share by the current share price of the company for calculating the dividend yield.  Then multiply that result by 100. You can understand it with a simple example. If the annual dividend pays by a company is Rs.10, and the latest share price is Rs. 500, their dividend yield is 4% (20/500*100). The dividend yield increases when the pay of dividends increases. It also increases when there is a fall in the share price of the company. Dividend Yield Funds invest in equity or equity-related instruments of companies that can offer high dividends to their investors.

Features of dividend yield mutual fund schemes

People invest in Dividend Yield Funds in order to build extra wealth. This mutual fund can fulfill certain specific purposes. Some of the attractive features of dividend yield mutual fund are:

• These funds can provide a better yield on your investments in the long run. The managers of these funds invest in the stocks of blue-chip companies for creating a better portfolio for their clients.
• You can see some of the best dividend yield funds invest in firms famous for paying large dividends. That means these dividends invest in stocks that regularly pay an above-average dividend.

• As per the guidelines of SEBI, this type of mutual fund needs to invest at least 65% of its assets in the dividend yield stocks of good companies.
• Most of the high dividend-paying companies either distribute a part of their profit among stakeholders or reinvest the net profit to increase their wealth.

Things to consider before choosing dividend yield funds to invest

Before investing, investors need to look at the past performance of the funds that they choose. If you plan to invest in dividend yield funds, ensure to consider the following factors before investing.

• Consider the risk tolerance of the fund
• Get an idea about the tenure of the fund
• Avoid schemes with small corpus funds
• These funds might not perform well during bull markets because most of the dividend yield companies have blue-chip stocks. Value stocks or growth stocks perform better at the time of bull runs.
• It is best suited for long-term investments, not advisable for short-term investors.

Mutual funds are a great choice for those who wish to build wealth. And you can find different types of funds to fulfill your investment needs. Dividend Yield Funds are one of them that mainly invest in stocks of companies that offer high dividend yields. The dividend yield for these funds is a strategic tool to identify high-value stocks. If the companies can pay good dividend payouts over the years as a proportion of their earnings, you can understand that it is a stable company. Such companies are capable of balancing their reinvestment for growth and dividend.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh