Best Dividend Yield Funds Sorted by Last 3 Year Returns
About Dividend Yield Mutual Funds
Dividend-yield mutual funds are a category of mutual funds that invest predominantly in companies that declare dividends periodically. Dividends are a sum of money that some companies pay out of their profits to their investors. Hence, earning dividend returns is an important aspect of equity investment.
Companies that pay regular dividends are usually financially stable and make a profit. Hence, without a doubt, dividend-yielding stocks are highly sought-after. These stocks are traded in large volumes and enjoy high liquidity.
As per the norms, dividend-yielding funds must invest >65% of the fund’s capital into dividend-yielding instruments. A further classification is done based on the fund’s equity exposure. The fund is a dividend yield equity scheme if the fund manager invests >65% in equities. Otherwise, it is a dividend yielding debt fund.
How Do Dividend-Yield Funds Work?
In mutual fund categories, dividend-yield funds are those that invest primarily in equity and equity-related instruments of companies and businesses that declare dividends on a periodic basis. As per regulatory norms, dividend-yield funds must invest more than 65% of the capital of the fund in dividend-generating instruments. In case this is below the mark, the fund is known as a dividend-yield debt mutual fund.
Dividends are payouts that companies share with investors if they want to distribute a portion of their profits. In mutual funds that yield dividends, investors may potentially earn returns as well as dividends. Mutual funds are dividend-yield funds if they invest in reputed companies that have a history of high dividend payouts. These companies may be considered stable as per industry standards and portray potential profitability over time.
Features Of Dividend Yield Mutual Funds
Dividend-yield funds invest in equity schemes with an emphasis on dividend-yielding stocks. Usually, these funds invest in stocks with a track record of paying higher dividends. Further, companies only announce dividends when they are earning profits. It aids the fund manager in selecting profit-making companies with a track record. These funds benchmark against the Nifty Dividend Opportunities 50 index.
- The fund manager must invest 70-80% of the corpus in companies paying dividends higher than the benchmark index.
- These fund managers often select companies based on their long-term market performance. Most of them would rather invest in blue chip companies with a simple business model than emerging companies with complex business models.
- Fund managers select stocks based on their track record of paying dividends.
- These funds aim to create a stream of regular income for investors to boost the value of their investments. According to SEBI, dividend-yield mutual funds must invest at least 65% of their assets in dividend-yielding stocks, including at least 50% in large-cap businesses.
- Companies with higher EPS and EPS growth rates are likely to increase their dividend payouts in the future – hence, they are often bought by these funds.
Advantages of Investing in Dividend Yield Mutual Funds
Dividend yield mutual funds have the following most significant advantages.
- These funds invest in companies that have the potential to offer regular dividends. Most often, these are stable, large-cap, blue-chip companies. These companies are more stable. Dividend yield funds are attractive for their moderate risk factor.
- Large company stocks are less impacted by market volatility. It helps these funds earn higher returns at a much lower risk.
- Dividend yield MFs are attractive to investors because they offer higher tax-efficient returns. The tax rates are lower for mutual fund investments than for equity dividend payout options. When you hold the fund for more than one year, the dividend gets converted into capital gains and taxed at 10% above ₹5,000 in income. Compared to the dividend payout option, which is taxed at 30%, dividend yield MFs are tax-efficient investments.
- These funds have the potential to generate higher returns in the future.
Risks Involved in Dividend Yield Mutual Funds
- Since it is an equity investment, dividend yield funds are exposed to market volatility. Investors must appraise themselves of the risks involved before investing in these funds. These funds are higher risk than debt funds but low risk compared to 100% equity funds. Hence, these funds appeal to investors with moderate risk appetites who want faster and higher returns on their investments.
- Investors should avoid investing in funds with smaller fund sizes. These funds appeal to most investors for higher returns from capital appreciation and regular dividends, but small mistakes in investment can eliminate your chances of earning higher returns.
- Thirdly, thematic dividend yield funds invest 80% of the fund’s corpus following a common theme. The approach increases the risk of investing in these funds. Success depends on how the theme plays out. Hence, these funds are more suitable for experienced investors with knowledge of equity investment.
- Investors need to understand that returns on dividend yield MFs are less than those of small or mid-cap funds when the market is rising. It is mostly because these funds invest in large, stable companies, which have less room for growth. However, these companies are also less volatile and generate stable returns.
Factors To Consider Before Investing in Dividend-Yield Funds
If you are wondering whether dividend-yield funds can be considered for investment, you must reflect on the specific elements relating to your own investment strategies and requirements:
- If you are looking for consistent income, dividend-yield funds may be worth looking into. Investors who are trying to set up a dependable source of income for themselves may think about investing in dividend yield funds. The dividend payment is not guaranteed on a consistent basis because it is fully dependent on the market success of the underlying businesses, corporations, and overall market movements. These funds are an excellent option for first-time stock investors. However, before making an investment in dividend-yield funds, it would be prudent for investors to pay attention to historical information about company stock invested in the fund and the amounts of dividends paid in the past.
- You may consider a dividend-yield fund if the fund invests most of its capital in dividend-generating equity. Furthermore, dividends paid out should potentially be higher than those of the benchmark index.
- You must also think about how stocks that yield dividends are chosen for a particular fund you may be considering. You may evaluate this yourself before investing.
- If you want to invest in a dividend-yield fund, you may likely consider equity that potentially generates a regular dividend income. In this regard, you may reflect on the asset allocation of the fund in terms of the equity of companies of different sizes.
- The duration of the fund’s operation is an important factor to consider, as it is for most other mutual funds. A dividend yield fund that has undergone fluctuating market periods is in a better position to give reliable returns than a newer one. In addition, freshly launched funds may do well if market conditions are favourable. Be careful to take the fund’s duration into account and evaluate how it performed over several market cycles.
Who Should Invest In Dividend Yield Mutual Funds?
These funds suit investors who want to invest in equities but with reduced volatility. The primary underlying securities of these funds are companies with robust financials, which allow them to pay regular dividends. Investors can allot their savings to dividend-yielding funds to earn higher returns. However, investors must take into account the following factors before investing.
- Investment objective: Investors trying to earn a steady income from regular dividend payouts may like these funds.
- Investment risks: The risk-bearing abilities of one investor are different from another and play a critical role in determining the right investment options.
- Experienced fund manager: The fund manager of dividend-yielding mutual funds selects underlying assets based on extensive research. Hence, the returns are related to the strategy of the fund manager and the assets he selects.
Taxability Of Dividend Yield Funds
You must consider all aspects of taxation before investing in any mutual funds. For dividend yield mutual funds, tax incidences depend on the fund’s allocation pattern. If the fund allocates >65% of its assets to equities, the equity investment tax rules will apply. Otherwise, debt fund tax rules will apply.
The dividends received are added to the taxable income and are taxed as per the income bracket of the investor. In addition, there is a 10% TDS on dividend amounts exceeding ₹5000 in a financial year.
The tax rate further depends on the duration of the holding period and the nature of the fund distribution. Understanding the type of dividend-yielding funds – debt or equity- will help you plan for the taxes better.
For dividend debt funds, capital gains are taxed at the rates below –
- Short-term capital gain tax: If the units are sold before 3 years or 36 months, the capital gain is taxed according to the assessee’s income tax slab rate.
- Long-term capital gain tax: Capital gains realised from selling the debt fund units after 36 months are taxed at 20% after indexation.
If the fund allocates more than 65% of the corpus into equities, it is treated as an equity fund for capital gain taxes. In that case, capital gain tax rates for equity mutual funds will apply, which are the following –
- STCG tax: 15%+cess for a holding period of less than 12 months.
- LTCG tax: Gains up to Rs 1 lakh are tax-free. Above the limit, a 10 %+cess tax is applied.
How To Invest in Dividend Yield Funds?
Investing in the dividend yield Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1: Log in to your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Choose a dividend yield fund that suits your needs and risk profile. You can learn more about each dividend yield fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the dividend yield fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Dividend Yield Mutual Funds to Invest in
The following are some of the best dividend-paying mutual funds –
| Name of the fund | AUM in ₹ crore | Minimum investment in lumpsum in ₹ | 3-Yr CAGR % | 5-Yr CAGR % |
| Templeton India Equity Income Fund | 1,350.66 | 5000 | 38.30 | 14.33 |
| ICICI Dividend Yield Equity Fund | 1,258.26 | 500 | 38.77 | 12.26 |
| Sundaram Dividend Yield Fund | 382.67 | 5000 | 26.59 | 11.66 |
| UTI Dividend Yield Fund | 2,786.59 | 5000 | 25.78 | 11.32 |
| Aditya Birla SL Dividend Yield Fund | 850.3 | 1000 | 31.28 | 10.19 |
The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on a 5-year CAGR, which is subject to change frequently. Check out real-time data on Angel One.
Templeton India Equity Income Fund
The fund invests in equities, which provide regular dividends. Since it is an equity investment, the risk of the investment is very high. The fund follows the Nifty Dividend Opportunities 50. It has an exit load of 1.00% and allows SIP and lumpsum investments.
ICICI Dividend Yield Equity Fund
The next on the list is the ICICI Dividend Yield Fund, which has earned an average return of 13.98% p.a. Since its introduction in 2014. It is a high-risk fund. The expense ratio is 0.65%.
Sundaram Dividend Yield Fund
The fund’s expense ratio is 1.02%, as opposed to the category average of 1.74%. The fund invests primarily in equities to generate significant returns for investors.
UTI Dividend Yield Fund
The UTI Dividend Yield Fund is a medium size fund that invests primarily in equity instruments. The fund’s expense ratio is 1.46%, which is lower than the category average of 1.74%. It follows the NIFTY 500 TRI benchmark index for generating returns.
Aditya Birla SL Dividend Yield Fund
It is a mid-size fund. The risk of investing in the fund is higher since it invests in equities. The expense ratio is 1.73%. The fund allows investments in lumpsum and SIPs. It follows the NIFTY 500 – TRI benchmark and generates better returns than the category average.
Mutual Funds Calculators
Dividend Yield Funds FAQs
Are dividend yield mutual funds high risk?
These funds don’t suit investors seeking stable returns and low volatility. It is important to understand that dividends are not guaranteed. It depends on the performance of the company and the market. You can learn more about the risk levels of each fund at https://www.angelone.in/mutual-funds under the Mutual Funds section.
Should I invest in dividend-yield mutual funds?
What are the expected returns of dividend yield mutual funds?
What are the risks involved in investing in dividend-yield mutual funds?
Are dividend yield mutual funds taxable?
How much money should I invest in dividend-yield mutual funds?
