The word mutual fund symbolises diversification and safety of the investment. It’s the fund managers who shuffle your investment around different securities to keep your money immune from the volatility risk and at the same time ensure you get healthy returns. Mutual funds are broadly classified into two types-equity funds and debt funds. Within these funds, there are many sub types of mutual funds. Equity funds, as the name suggests, invest primarily in stocks and equity products. While debt funds invest a major portion of the money in debt instruments like bonds, debentures, fixed maturity plans, etc. Within the equity funds, there is one fund called dividend yield fund on which we will keep our eyes on in this article.
How does dividend yield fund work?
Dividend yield fund invests around 60%-80% of the money in stocks offering a higher dividend yield than the average dividend yield of the market, be it equity or Nifty, the stock exchanges. The dividend yield is derived by dividing the per unit dividend with the market price. The reason why fund managers invest in stocks with a high dividend yield is because of the growing possibility of earning higher dividends with those funds. Therefore, the dividend payout factor is critical as it indicates the firm’s consistency in churning out good profits. High dividend yields generally result from lower prices.
- These funds invest in stocks of companies which have a stable cash flow and can pay dividends regularly at a steady rate. These companies do not reduce their dividend even during the times of downturn. Investments in such companies make funds stable and less volatile.
- Dividend yield returns fall less during the downturn as the value aspect of the funds steps into the situation. Dividend yield funds start looking attractive from the prospective of dividend income.
- Dividend yield funds enjoy value proposition on the back of dividend yield factor. High dividend yield, like price-to-earning ratio or price to book value ratio, indicates that market segments are inexpensive.
Things to keep in mind
- Conservative investors should opt for a large-cap oriented dividend yield fund as investment in mid and small cap stocks can elevate the risk levels, which would not appeal to these class of investors.
- Keep an eye on the website of rating agencies to find the market-cap category to which the dividend yield fund belongs to.