Dependable Dividend Yield Funds

dividend yield funds present an appealing option for investors seeking lower volatility and consistent performance within their investment portfolios. Considering their track record of delivering favourable returns and the benefits they offer in terms of diversification, investors may find dividend yield funds to be a valuable addition to their investment strategy. Rakesh Deshmukh takes a closer look at the scenario to see how it works 

Dividends are a significant aspect of investing in equity or equity-related instruments. Many companies share a portion of their profits with shareholders by declaring and distributing dividends. While some companies pay high dividends, others do not declare dividends at all. It is not mandatory for companies to offer dividends. They choose to declare them for various corporate and invest ment reasons. Declaring a dividend places a company in the good books of their investors. Before delving deeper, let us first understand what ‘dividend yield’ means. 

Dividend yield is the dividend paid per unit divided by the market price. Dividend yield mutual funds are equity funds that invest in equity and equity-associated instruments of companies known for declaring high dividends. A company can declare high dividends only if it makes good profits. Therefore, most of these stocks belong to profit-making companies with an excellent track record. As per the guidelines prescribed by Securities and Exchange Board of India (SEBI), dividend yield mutual funds (MFs) are required to allocate at least 65 per cent of their portfolio from dividendyielding stocks. 

There are about eight active dividend yield mutual funds and each fund has completed more than a year. Typically, a dividend yield fund invests in stocks with a dividend yield higher than that of the market or the benchmark. This acts as a filter to assist the fund manager in selecting stocks. Companies that pay good dividends usually have strong cash flows and are more stable than most other stocks. Fund houses typically identify ‘high dividend’ companies by comparing their dividend yields to those of benchmark indices like Sensex or Nifty 50. 

For example, if the current dividend yield of Nifty 50 is approximately 1.25 per cent, a dividend yield fund tied to Nifty 50 would prioritise investing in companies with dividend yields exceeding 1.25 per cent. You might wonder if dividend yield funds exclusively invest in high dividend-paying companies. As discussed above, dividend yield funds are bound to allocate 65 per cent of the capital to high dividend-paying companies, with the remaining portion invested in stocks that the fund manager identifies as having high potential for returns. This strategy is founded on the notion that companies with lower dividend yields or those that do not pay dividends can still offer favourable returns if their underlying fundamentals are robust and they are undervalued. 

Additionally, this approach provides investors with diversification across different types of equities, balancing income generation with potential growth opportunities. It’s important to note that the criterion is not merely high dividends but a high dividend yield. This means that if a stock pays good dividends but has a very high market price, the dividend yield is low and the fund might not invest in it. In addition to dividend yield, fund managers also consider growth prospects and other fundamentals before making investments. 

Monthly Inflows in Dividend Yield Funds 

The recent trends in the mutual fund industry, as reflected in the data published by the Association of Mutual Funds in India (AMFI), paint a compelling picture of growth and shifting investor preferences. The AUM (assets under management) of growth or equity-oriented schemes has surged impressively, marking a remarkable 56 per cent increase from April 2023 to April 2024. This surge underscores a robust investor appetite for growth-oriented investment vehicles, with the AUM soaring from ₹15.84 lakh crore to ₹24.74 lakh crore during this period. 

Simultaneously, dividend yield funds have emerged as a standout performer, experiencing a staggering 74 per cent growth trajectory. This surge has propelled the AUM of dividend yield funds from ₹14,471.62 crore to ₹25,216.76 crore within the same timeframe. Delving deeper into the dynamics of dividend yield funds, their average monthly inflow stands at a noteworthy ₹286.84 crore in the last one year. What is particularly noteworthy is the recent surge in inflows, surpassing the 12-month average in the last two months. 

This trend underscores a growing investor interest in dividendfocused strategies, possibly driven by a desire for stable income streams amidst market uncertainties. Moreover, while dividend yield funds still represent a relatively small portion of the total AUM of growth or equity-oriented schemes, contributing nearly 1 per cent on an average every month, their increasing significance underscores a notable shift in investor preferences towards income-generating assets within the broader growthoriented investment landscape. 

Benchmark Return versus Dividend Yield Funds versus Other Category Funds 

Now, let us move on to the performance analysis part of these dividend yield funds. We will explore the overall average returns these funds have delivered across different timeframes and compare the returns with the benchmark returns. Did they deliver a great performance compared to their benchmark? Let’s explore. 

It appears that dividend yield funds have consistently demonstrated an impressive performance across various timeframes, surpassing benchmark indices and competing favourably with other mutual fund types. Interestingly, in comparison to Large-Cap funds, dividend yield funds have notably outperformed, consistently delivering superior returns. This suggests that investors who opted for dividend yield funds have likely experienced better returns compared to those who invested in large-cap funds during the same periods. However, the comparison with Small-Cap and Mid-Cap funds presents a nuanced perspective. 

While dividend yield funds have generally performed well, there are instances where small-cap and mid-cap funds have outperformed them. This implies that for investors seeking higher risk and potentially higher reward opportunities, small-cap and mid-cap funds might offer attractive alternatives. Interestingly, even when compared to multi-cap funds, dividend yield funds have emerged as strong performers, consistently outperforming them across the analysed timeframes. This underscores the consistent performance and appeal of dividend yield funds as an investment option, even when compared to diversified multi-cap funds. 

What would have happened if you had started a SIP of ₹10,000 in growth large-cap funds versus dividend yield funds over the last five years? Having observed that dividend yield funds consistently outperformed equity large-cap funds across the entire timeframe without exception, let us now explore the scenario of investing ₹10,000 per month as SIPs in the best-performing funds in both the categories, starting with dividend yield funds. 

In essence, the investment of ₹6,00,000 spread over five years, with a monthly SIP of ₹10,000 in dividend yield funds, has remarkably flourished to ₹13,69,728. This translates to a commendable profit of approximately 128.29 per cent, reflecting an impressive, annualised return of 33.74 per cent over the same duration. 

Conversely, the investment of ₹6,00,000 over five years with a monthly SIP of ₹10,000 in large-cap funds has matured to ₹10,65,950. Although still demonstrating growth, this represents a comparatively lower profit of about 77.66 per cent with an annualised return of 21.18 per cent during the same timeframe. 

Suitability of Dividend Yield Funds 

Dividend yield funds are best suited for investors who prefer a more conservative approach to investing in equities. These investors typically seek:
1. Stable Returns: Individuals who prioritise consistent income over high growth potential may find dividend yield funds appealing due to their focus on companies that pay regular dividends. 2. Lower Volatility: Investors who are averse to the high volatility often associated with pure equity investments may find dividend yield funds more suitable. These funds tend to invest in financially stable companies, which can help mitigate some of the market’s ups and downs.
3. Diversification: Investors aiming for a diversified portfolio may include dividend yield funds as part of their investment strategy. These funds can offer exposure to a broad range of companies across various sectors, enhancing diversification. 

Conclusion
In conclusion, dividend yield funds offer a compelling investment avenue for investors seeking stable returns and lower volatility within the equity market. By focusing on companies known for declaring regular dividends, these funds provide an investment opportunity in high dividend-paying companies, which are generally stable and have long-standing experience in their respective fields through mutual funds. 

Moreover, dividend yield funds contribute to portfolio diversification by offering exposure to a broad range of companies across various sectors. This diversification can help investors manage risk more effectively and navigate through market uncertainties with greater confidence. 

The recent performance analysis demonstrates that dividend yield funds have consistently delivered impressive returns across various timeframes, often outperforming benchmark indices and competing favourably with other mutual fund categories. Notably, in comparison to large-cap funds, dividend yield funds have showcased superior performance, offering investors attractive returns over the long term. For investors considering large-cap funds for long-term investment strategies, allocating a proportion of their portfolio to dividend yield funds could prove beneficial. 

As highlighted in the performance analysis, dividend yield funds have demonstrated better performance compared to large-cap funds, suggesting that they could enhance the overall portfolio returns. In summary, dividend yield funds present an appealing option for investors seeking lower volatility and consistent performance within their investment portfolios. Considering their track record of delivering favourable returns and the benefits they offer in terms of diversification, investors may find dividend yield funds to be a valuable addition to their investment strategy.