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Introduction to Dividend Yield Funds
Stocks that earn dividends regularly are more attractive than those which don’t, especially if the investor is looking for regular income out of his investment. Here you will read about Dividend Yield Mutual Funds which invest in Dividend Yield stocks. The write-up will cover the Dividend Yield Fund meaning, its features, different factors to check before investing in it, and other aspects.
What are Dividend Yield Funds
For understanding the Dividend Yield Fund, you need to first understand the Dividend Yield definition. The Dividend Yield is the amount of dividend paid per share divided by the share’s market price. So, now if you are wondering about Dividend Yield Mutual Funds then it is those Equity Mutual Funds that invest in companies paying high dividends or having higher dividend yields. A company declares dividends out of its profits, especially the well-known big companies.
Features of Dividend Yield Funds
The features of this Dividend Yield fund includes:
- Stable regular income: As the dividend is the primary criteria for choosing the stocks in this fund, you can expect a regular return on your investment. However, the mutual fund house needs to book the profit from its holdings to distribute the dividends amongst the investors.
- Lower volatility: Dividends are provided regularly by highly stable companies, which are reputed in the market and have a brand value. These are generally big companies having large market capitalization. Thus, the risk factor is lower as these companies’ stocks do not get much affected by short-term market volatility.
How do Dividend Yield Funds Work
As per SEBI’s guideline, the fund house providing the Dividend Yield Fund has to invest at least 65% of its assets under management (AUM) of the fund in equity and equity-related instruments of high dividend-yielding companies. The fund manager of these funds generally invests more than 65% into dividend-yielding stocks to provide better returns to the investors. The remaining corpus is invested in other assets to increase the returns and mitigate the risk.
Who Should Invest in Dividend Yield Funds
These funds provide a relatively stable return as they generally invest in companies that are already mature or Large-cap companies. So, investors looking for stable returns and primarily for regular income from the dividends can invest in these funds.
What is the Minimum Investment Amount Required
If you are wondering that these funds invest in large companies and you would need a lot of money to start investing, then it is not the reality. Though the minimum investment requirement varies from one fund to another, for most of the funds, you can start investing in these funds with mere Rs. 500 through SIP investment. If you choose to invest in one go, then for that you just need Rs. 5,000 for lump sum investment. You do not require lakhs of rupees to start investing in mutual funds. This is the best part of investing in any mutual fund and the same applies to Dividend Yield Funds. You can start investing with a very small amount if you want. The power of compounding can help that little amount to grow exponentially provided you stay invested for a longer duration.
Taxation of Dividend Yield Funds
If you redeem your investment in a Dividend Yield Fund before completing 12 months from the date of purchase, then your profits will be categorized as short-term capital gains and will be taxed at a flat rate of 15%.
On the other hand, if you’re taking profits after one year from the date of purchase, your profits will fall under long-term capital gains. In a financial year, if your long-term capital gains do not exceed Rs. 1 Lakh, then you’re eligible to get a tax exemption, and if it exceeds that, then the excess amount will be taxed at 10% without indexation.
Suppose you made a long-term capital gain of Rs. 1.50 Lakhs from an equity mutual fund in a financial year. Here, Rs. 1 Lakh will be exempted from income tax and the remaining Rs. 50,000 will be taxed at 10%.
At present, you just need to pay the capital gain taxes on the profits of these funds like any other Equity Fund. For investment tenure less than equal to 1 year, you need to pay short-term capital gain tax which is 15%. While if you hold the funds for more than 1 year then the profits will be taxable as per long-term capital gain tax. The dividends will be taxed as per the tax slab you fall into.
Things Investors Should Consider Before Investing in Dividend Yield Funds
- Funds tenure: When you are investing in a Dividend Yield Fund, you need to check for how long the fund was created.
- Underperform in the bullish market: Since, the companies which pay dividends regularly are generally mature, well-established companies,the fund may provide normal returns. Thus, these funds will not outperform like Mid-cap or Small-cap during the bullish market cycle.
How can you Invest in Dividend Yield Funds Through Nivesh
Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:
- Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
- On your portfolio page click on the Buy New tab at the right top corner of the screen.
- Select the category and choose the funds you want to purchase.
- If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
- Fill the transaction details and confirm. You can place up to 5 orders in one go.
- You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.
Frequently Asked Questions (FAQs)
1. Are Dividend Yield Funds Risk-Free?
Any equity investment has a certain amount of risk involved. It cannot be completely risk-free unless you invest in government bonds or securities. The Dividend Yield Funds invest in mature, well-established companies so, there is lesser volatility in comparison with other Equity Funds.
2. What is the Minimum Amount to Invest in a Dividend Yield Fund?
If you want to invest monthly via a Systematic Investment Plan (SIP) then you can start investing with just Rs. 500 as well.
3. How Long Should you Invest in a Dividend Yield Fund?
You can invest for 5 years or less. However, there is no harm in investing in the long-term though.
4. Can we Redeem the Dividend Yield Fund Anytime?
Yes, you can redeem the amount from the fund at any time you need to post accounting for exit loads if applicable. There is no lock-in period.
5. Is There any Tax on the Dividend Yield Fund?
Yes, the capital gain tax is payable by the investor on the profits from these funds. The rate of taxation depends on the tenure for which you invest in these funds.
