• Dividend Yield Mutual Funds: An Overview

   

Investments give returns in two forms – capital appreciation and dividend payout. When a mutual fund has investments in companies that offer dividend payout, they are known as dividend yield mutual funds or dividend mutual funds.

 

These dividend-paying mutual funds have investments only in stable companies that offer a good dividend payout regularly. The main aim of these mutual funds is not capital appreciation but returns with low volatility.

 

Investors enjoy low volatility here because the fund managers will invest in stocks of companies that declare high dividends. Companies can generally declare high dividends only when profit-making, implying a higher possibility of stability during a volatile market.

 

Fund houses or managers choose high-dividend mutual funds by comparing the dividend yield with the benchmark index. If the yield is higher than the benchmark, it will get categorised as a high dividend mutual fund.

 

These mutual funds are further classified based on the asset class where the majority of funds are directed. For example, 70%-80% of funds are in equity; it will be an equity fund. But if the same is allocated in debt, it will be a debt fund.

 

Generally, debt dividend-paying mutual funds are more stable and less volatile. At the same time, equity funds have higher volatility. But they may also offer better returns than debt funds.

 

• Reasons to Invest in Dividend Yield Mutual Funds

   

Choosing the best dividend-paying mutual fund comes with a number of benefits, from stable earnings to portfolio diversification and more. Some of the top benefits are listed below: 

 

1. Get regular dividend income from the underlying equity or debt instruments

2. Enjoy enhanced tax benefits as dividends can be tax-exempt

3. Secure better returns due to investment steady and profitable companies

4. Lower risk when compared to pure equity investments

5. Diversify your investment portfolio to mitigate the risks of other high-risk instruments

6. Stay motivated to invest further and in different instruments due to stable returns

    

• Ideal Investor Type for Dividend Yield Mutual Funds

   

Two key features of dividend mutual funds are that they offer stable returns and lower volatility. As such, they become a great and ideal instrument for investors who have a low-risk appetite and want to secure returns. 

 

Given the nature of these funds, they are not an ideal avenue for investors who are looking for aggressive growth and have a higher risk appetite. In this case, you can choose pure equity or capital appreciation instruments. 

 

However, you can still invest in these mutual funds to diversify your portfolio and mitigate the risks. This way, you can keep your investment, returns, and, thereby, your financial well-being secure.

Whether you are making a small or big, safe or risky investment, you need to be mindful and keep a few points in mind to get the best from it. In terms of choosing dividend funds, given below are some essential points to keep in mind.

 

• Your Risk Tolerance

   

If you can absorb high risk and want aggressive growth, dividend-paying mutual funds may not be the ideal choice. However, if you are a risk-averse investor and want returns, these mutual funds can be a great option.

 

• Fund Cap and Size

   

Mutual funds are also categorised based on the size of companies the managers invest in. If it is a large company, the fund is generally referred to as a large cap. Small or mid-cap funds are those where companies are small or mid-size.

 

Since dividend mutual funds are risk-averse, the ideal shares would be large-cap. As such, avoid funds that have mid or small-cap. You should also consider the fund size.

 

A mutual fund with a large AUM implies that it's popular with investors, possibly due to good returns. This can help you secure your investments.

 

• Fund Performance 

   

It is crucial to see the dividend mutual funds' performance in different market cycles to ensure that your investment is secure during a bear and bull market. Moreover, a mutual fund that has been around for a long implies that it’s doing good and can sail through different market situations.

 

In addition to the above, you need to check the expense ratio to ensure that you are choosing the best option. You should also remember that a significantly high dividend payout can imply a lack of growth opportunities. 

 

Now that you know what dividend mutual funds are and how you can choose the best one, remember to invest per your risk tolerance and goals. You should keep in mind that dividends depend on the company’s profit, and as such, you may not get the same amount always. 

 

You should also try to diversify your investments, even in mutual funds, to keep your investments and returns secure. On Bajaj Markets, you can choose from numerous investment options for mutual funds and invest with zero commission.