Dividend yield funds have emerged in the limelight and are drawing the interest of investors significantly.
Dividend mutual funds, as the name suggests, follow a strategy of investing in equities that generate higher dividend yields.
If numbers are anything to go by, dividend yield funds as a category have witnessed inflows of Rs 6,542 crore over the past two-and-a-half years. Similarly, the outflow has been Rs 600 crore in the 18 months ended December 2020, as per the data from the Association of Mutual Funds in India (AMFI).
When it comes to taxation, it is a profitable move to invest in dividend-yield funds instead of opting to directly buy the stocks of dividend-paying companies.
Investment yield funds are relatively tax-efficient because the long-term capital gains (LTCGs) tax on mutual funds is 10%.
The rise in popularity of dividend yield funds could be attributed to improvement in profitability of the public sector undertakings (PSUs), which are a significant part of dividend yield funds.
Dividend yield funds are quite different from sectoral funds. Such funds focus on companies that are related to a particular trend or theme. For instance, an infrastructure theme fund will most likely invest in sectors, including cement, steel or power, etc.
Generally, dividend yield funds are unaffected by stock market volatility. They are known to be a solution to beat market turbulence. However, dividend yield funds could be volatile in the short term as they are known to invest in equities.
Dividend yield funds are suitable for investors who have their ears to the ground and have advanced knowledge of macro trends in the markets. It is also an option for such investors who are known to undertake selective bets while eyeing higher returns.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
