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What are Dividend Yield Funds?

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Dividend yield funds are a type of mutual fund that invests in dividend-yielding stocks, with at least 65% in stocks. The primary objective of these funds is to provide investors with a regular income stream in the form of dividends.

While income is the priority, dividend yield funds can also offer the potential for capital appreciation if the underlying stock prices increase. Fund managers identify companies that have a strong track record of paying high dividends relative to their share price.

Scheme Name

AUM (Cr.)

SBI Dividend Yield Fund

7,630

HDFC Dividend Yield Fund

5,145

UTI Dividend Yield Fund

3,776

Source: AMFI website as of May 29, 2024

Who Should Invest in Dividend Yield Funds?

Before investing in dividend yield funds, it’s essential to identify your risk profile and financial goals. These funds may be suitable in the following situations:

  • Long-term Investors Seeking Stability: Ideal for those who prioritize steady returns over the long term.

  • Risk-Averse or Conservative Investors: Suitable for individuals who prefer lower-risk investment options.

  • Wealth Preservation: Beneficial for investors focused on preserving wealth while earning regular income.

Taxation of Dividend Yield Funds

Short Term Capital Gains (STCG) Tax
Gains from a dividend yield fund held for up to 12 months are taxed at 15%.

Long Term Capital Gains (LTCG) Tax
Gains from a dividend yield fund held for more than 12 months are taxed at 10%, with an exemption for gains up to Rs 1 lakh in a year.

Dividend Taxation
Dividend Yield funds pay out dividends when you invest in their IDCW (Income Distribution Cum Withdrawal) option.

  • Dividends are taxed at your marginal income tax rate.

  • TDS (Tax Deducted at Source) at 10% applies to dividends received over Rs 5,000 per AMC per financial year.

Advantages of Dividend Yield Funds

Regular Income Stream

The primary advantage is the potential for regular income through dividend payouts, creating a reliable source of cash flow. This is especially attractive for retirees or investors seeking to supplement their income.

Potential for Stability

Dividend yield funds often invest in well-established companies with stable earnings and track records of dividend payments. These funds may exhibit lower volatility compared to pure growth-oriented funds, particularly during market downturns.

Compounding Potential

Many dividend yield funds offer a dividend reinvestment option, allowing you to purchase additional shares with the dividends received. This compounding effect can lead to significant growth of your investment over the long term.

Portfolio Diversification

Dividend yield funds can add diversification to an Indian investor’s portfolio that might be heavily focused on growth stocks. These funds might invest in mature companies across various sectors, broadening your investment exposure.

Disadvantages of Dividend Yield Funds

Limited Capital Appreciation Potential

While dividend yield funds offer income, their potential for significant capital appreciation might be lower compared to growth-oriented funds that invest in rapidly expanding companies. Investors prioritizing high capital growth may need to compromise on some growth in favor of income.

Market Risk and Volatility

Even companies with strong dividend histories are subject to market fluctuations that can impact their share prices, leading to potential capital losses. Dividends can be reduced or suspended entirely, especially if a company faces economic headwinds or changes its dividend policy.

Sector Concentration

Dividend yield funds in India might have a higher concentration in specific sectors that are traditionally known for paying dividends (e.g., utilities, consumer staples). This can lead to increased vulnerability if a particular sector faces challenges or underperforms.

Potential for Underperformance

In strong bull markets, growth-oriented funds might significantly outperform dividend yield funds. Dividend yield funds might miss out on the high-growth potential of newer, innovative companies.



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