Dividend Mutual Funds

What Are Dividend Mutual Funds?

High dividend mutual funds invest in companies that regularly pay dividends, focusing on those with higher-than-average dividend yields. The dividend yield is calculated as the annual dividend per share divided by the share price, expressed as a percentage.

Investment Focus: These funds focus on companies that offer attractive dividend yields compared to the overall market. This strategy helps investors earn income while investing in companies with good financial health.

Portfolio Composition: Dividend Mutual Funds typically allocate 70-80% of their assets into stocks that offer higher-than-market dividend yields. This means the companies they invest in are financially stable, have strong cash flows, and are more likely to continue paying dividends.

What Are Dividend Mutual Funds?

High dividend mutual funds invest in companies that regularly pay dividends, focusing on those with higher-than-average dividend yields. The dividend yield is calculated as the annual dividend per share divided by the share price, expressed as a percentage.

Investment Focus: These funds focus on companies that offer attractive dividend yields compared to the overall market. This strategy helps investors earn income while investing in companies with good financial health.

Portfolio Composition: Dividend Mutual Funds typically allocate 70-80% of their assets into stocks that offer higher-than-market dividend yields. This means the companies they invest in are financially stable, have strong cash flows, and are more likely to continue paying dividends.

Who Should Invest in Dividend Yield Funds?

• Investors Seeking Passive Income: These funds are ideal for those looking to generate a steady income from their investments, as they regularly distribute dividend payments.
• Low-Risk Investors: For investors who are more risk-averse and prefer stable, lower-risk investments, high dividend mutual funds are a good choice due to their focus on reliable, dividend-paying companies.

Features of Dividend Mutual Funds

Here are some features of dividend paying mutual funds that you should be aware of —

• Source of Income: These funds provide a steady income stream, as they focus on companies that regularly pay dividends.
• Lower Risks: Investing in stable companies with strong brands reduces the risk, as their stocks are less affected by short-term market fluctuations.
• Focused Sector Exposure: While they focus on dividend-paying companies, the funds might not be fully diversified, making them suitable for specific market sectors.
• Long-Term High Returns: These funds have the potential to offer high returns over time, as they invest in companies with strong financials.
• Regular Income: For investors seeking consistent income, dividend yield funds offer regular dividend payouts.
• Investment Options: You can invest through lump-sum payments or via Systematic Investment Plans (SIPs), which allow you to invest at regular intervals.

8 Best Dividend Mutual Funds

Below table shows the list of top monthly dividend paying mutual funds —

How Does a Dividend Yield Fund Work?

• Dividend Payout: The fund collects dividends from the companies it invests in and distributes them to investors, usually quarterly or annually.
• Dividend Reinvestment: Instead of payouts, dividends can be reinvested into purchasing more shares of the fund, potentially increasing your overall investment and returns.
• Investing in Stable Companies: The fund focuses on companies with a strong track record of paying consistent dividends, ensuring a stable and reliable source of income for investors.

Risks Involved in Dividend Yield Funds

With high paying mutual funds, comes some risks. Here are some of them —

• Market Risks: Though these funds are less volatile than other equity funds, they still carry market risks, meaning returns are not guaranteed
• Liquidity and Credit Risks: Mutual funds, including dividend yield funds are subject to risks like liquidity risk (difficulty in selling assets) and credit risk (the possibility of companies defaulting on payments)
• Higher Taxes: Dividend income may be subject to taxes, which can reduce the overall returns
• Performance Variability: While dividend yield funds tend to be more stable, their returns depend on market conditions and the performance of the companies in which they invest

Taxability of Dividend Yield Funds

Unlike direct investments in dividend-paying stocks, dividend paying mutual funds generally offer lower tax rates, making them a more tax-friendly option. Investors benefit from tax efficiency since dividends paid by the fund are subject to a lower tax rate compared to individual stock dividends.

Taxation on Dividend Yield Funds (as per the Union Budget 2023):

• Long-Term Capital Gains (LTCG): Taxed at 12.5% on financial and other financial assets
• Short-Term Capital Gains (STCG): Taxed at 20% for listed equity shares
• Dividend Income: Subject to 20% Tax Deducted at Source (TDS) for non-residents

Frequently Asked Questions