Dividend Mutual Fund: For those investors who expect their mutual fund investment to generate a passive income, and do not want to expose themselves to too much market risk, dividend yield mutual funds deserve your attention. Before we get to the core of the top funds in this category, with attractive returns. Let’s understand what a dividend yield fund is, how it works, whether you should invest and other significant factors.
Dividend mutual funds are equity-based funds that invest primarily in shares of companies known for consistently paying high dividends. Such funds focus on selecting stocks with a high dividend yield, which is the dividend per share divided by the stock’s market price.
As per SEBI, a dividend yield fund invests at least 65 per cent of the portfolio in stocks. As profit-making companies with a healthy cash flow are generally the ones announcing regular dividends, a significant portion of the portfolio of dividend yield equity funds is typically reserved for such companies.
How does dividend mutual fund work? How are they paid?
Dividend yield is the percentage of a company’s share price that is paid out as dividends. Dividend Yield Funds mainly invest in companies that regularly pay high dividends relative to their share prices. These funds prefer stocks with higher dividend yields and generally avoid expensive stocks whose dividend yield is low, even if they pay dividends consistently.
The fund manager invests your money in these dividend-paying stocks. There are two main ways you can receive your returns:
Dividend Payout: You receive a portion of the dividends collected by the fund, typically distributed quarterly or annually. This provides a steady stream of income.
Dividend Reinvestment: The dividends earned by the fund are automatically used to purchase additional shares within the fund. This increases your overall ownership (number of shares) in the fund, potentially leading to higher returns in the long run.
The timing of dividend payouts can vary based on the Fund’s policies. Some Funds distribute dividends monthly, while others opt for annual distributions.
Many Dividend Mutual Funds provide a Dividend Reinvestment Plan (DRIP), enabling investors to reinvest their dividends in acquiring units of the Fund.
Should you invest in dividend yield mutual fund?
Investments in dividend mutual funds are a great choice for those looking for both consistent income and possible capital gain. However, with any investment, you should evaluate your risk tolerance, your financial goals and the particulars of the funds you are considering, making sure they fit into your investment plan.
ICICI Prudential Dividend Yield Equity Fund – Direct Plan
Franklin India Dividend Yield Fund – Direct Plan
UTI Dividend Yield Fund – Direct Plan
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
