Should You Invest In Dividend Yield Funds?

Are you looking to supplement your salary with passive income? Do you want an investment that gives decent returns and regular income? You may consider investing in dividend yield funds. It invests most of its assets in dividend-yielding stocks. You may find dividend yield funds a good investment, especially when banks offer lower interest rates on fixed deposits. Should you invest in dividend yield funds?

What are dividend yield funds?

According to SEBI rules, you have dividend yield funds investing at least 65% of their assets in equity and equity-related instruments. You would find dividend yield funds investing around 75%-80% of their corpus in stocks of companies that pay dividends regularly to shareholders. 

Moreover, you have the remaining assets invested in stocks of well-established companies with the potential to offer higher returns over time. You have the fund manager of dividend yield funds picking stocks of companies that consistently declare higher dividends by comparing their dividend yield against a stock market index. 

It helps to understand dividend yield, which is the ratio that shows how much a company pays its shareholders in dividends relative to the share price. You can use the dividend yield to determine the returns you get through dividends from a company based on the share’s current price. 

Should you invest in dividend yield funds?

You may consider dividend yield funds if you prefer steady dividend income. It can supplement pension income, especially if you are retired and seek additional income to enjoy a higher standard of living. 

You may consider dividend yield funds if this is your first time in the stock market. It helps diversify your portfolio across stocks of companies that pay consistently higher dividends over time. 

However, aggressive investors may dedicate a small portion of their portfolio towards dividend yield funds. Companies that pay a higher dividend focus on paying out their profits to shareholders rather than reinvesting in the business for growth and expansion. 

For instance, aggressive investors prefer companies that focus on expansion and growth, resulting in higher share prices and wealth generation over time. However, experts recommend at least a little exposure towards dividend yield funds for investors looking to build a diversified portfolio. 

How to pick the right dividend yield fund?

You may consider checking the portfolio of the dividend yield fund to determine the stocks it holds. For instance, some dividend yield funds may have higher exposure to growth stocks, thereby offering a lower dividend yield. 

You could check the AMC’s track record and that of the fund manager over time. Moreover, it helps to pick a dividend yield fund that has performed well against the benchmark and peers. 

You could select a dividend yield fund with a lower expense ratio as compared to its peers. It is the cost of managing the mutual fund scheme. Funds with a lower expense ratio can increase your take-home returns over time. 

You must invest in dividend yield funds only if it matches your investment objectives and risk tolerance. For instance, these funds invest in stocks, and you must invest if you have higher risk tolerance. Moreover, it would help to focus on the returns from dividend yield funds across both the bull and bear market phases over time. In a nutshell, you may invest in dividend yield funds for passive income to supplement your salary or pension. 

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For any clarifications/feedback on the topic, please contact the writer at  cleyon.dsouza@cleartax.in