Dividends are a necessary feature of investing in equity or instruments which are equity-related. Many companies share a piece of their profits with their shareholders by issuing dividends. Some companies pay higher amounts of dividends while some others don’t issue dividends at all. It is not necessary for companies to issue dividends; companies choose to issue them to make investing in their stocks more engaging. Here, we are about to discuss Dividend Yield Mutual Funds and will get to know some salient features and factors that you require to know about them.
What is Dividend Yield Mutual Funds?
The dividend paid each unit is divided by the market price to have the Dividend Yield. Dividend Yield Mutual Funds are equity funds that usually invest in equity and instruments related to the equity of companies that are known to issue or declare high dividends. Moreover, a company can issue high dividends only if it makes better profits. Hence, most of these stocks belong to profit-making companies with outstanding track records.
Naturally, a dividend yield fund invests about 70% to 80% of its assets in stocks that pay a higher dividend yield than the market (or benchmark). Therefore, it behaves as a filter to assist the fund manager in stock selection. Companies that pay good dividends usually have high cash flows and are more secure than most other stocks.
It is very essential to note here that the basis is not only high dividends but a high dividend yield. This means that if a stock pays quality dividends but its price in the market is very high, then the dividend yield is low and the fund might not invest in it. Apart from the dividend yield, the fund managers also see the growth possibilities and other fundamentals before investing.
Dividend Option vs. Dividend Yield Fund
You must not puzzle a Dividend Yield Fund with the dividend option of a Mutual Fund.
Most mutual funds propose two options to investors for getting returns:
▪ Growth Option: In this option, the value of your holdings increases when the fund generates profits by selling its holdings.
▪ Dividend Option: In this option, you receive these profits as ordinary dividend payouts from the mutual fund.
A dividend yield fund chooses specific stocks and investments and as dividend payout from the companies as its fundamental theme. It is also available in both growth and dividend options.
Who should invest their money in a Dividend Yield Mutual Fund?
Dividend Yield Funds are equity schemes that pay attention to the dividend yield of stocks. Since these companies are usually secure, it is suggested for investors who wish to invest in equity but are looking for less volatility. While these are not suggested for rapid growth-seekers, dividend yield funds are a better addition to most investment portfolios.
Factors to observe before investing in Dividend Yield Funds:
We always suggest investors look at the previous performance of the fund before investing. Moreover, below are few factors that you can observe before investing in Dividend Yield Funds in India:
1. Invest according to your Risk Tolerance:
Suppose that you are a stable investor who prefers the dividend yield fund to add steadiness to your portfolio. Therefore, you must search for funds that have a higher allocation to large-cap stocks since your aim is to invest in a scheme that has low risk. However, if you invest in a scheme with higher attention to small-cap stocks or mid-cap stocks, then your goal of investing will be defeated.
2. Tenure of the fund:
Just like most other mutual funds, it is necessary to look at the period for which the fund has been in presence. A dividend yield fund that has survived bull and bear phases of the market is in a good position to provide steady returns as compared to the relatively new one. Furthermore, newly launched funds might show a quite good performance if the markets have been going up. Ensure that you consider the tenure of the fund and look at the activity across various market cycles.
3. Avoid Small Corpus Funds:
Many experts suggested that at the time of investing in a dividend yield fund, investors must ignore schemes with a small size corpus. This is because the right strategic investment can make the fund look the best as compared to others and even a pair of mistakes can dive it to the bottom of the performance table. Search for funds with a rational corpus size, low expense ratio, and low volatility in the past.
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