If you follow the Indian mutual funds space closely, you’ve probably noticed that Flexi-Cap funds have dominated many “best fund” lists for years.
And they have done it rightfully so. Their freedom to invest across market caps has made them a go-to choice for long-term wealth creation.
But in recent years, a quieter category has been making some serious noise: Dividend Yield Funds.
Over the past 3-year and 5-year horizons, the category average returns of dividend yield have surged past Flexi-cap funds.
| Comparing Returns: Dividend Yield Funds vs Flexi Cap Funds | |||
| Category | 3-Year | 5-Year | 10-Year |
| Dividend Yield Funds Category Avg | 16.25 | 15.92 | 14.53 |
| Flexi Cap Funds Category Avg | 14.42 | 11.92 | 13.01 |
| Source: Ace MF, Value Research, Data as of 27 March, 2026 | |||
So, what exactly are dividend yield funds and how do they work?
Should they have a place in your portfolio?
Continue reading to find out…
What Are Dividend Yield Funds?
Dividend yield funds are equity mutual funds with a core mandate: They must invest primarily in companies that pay consistent dividends.
As per the market regulator’s guidelines, these funds must maintain at least 65% of their assets in equity, with a preference for dividend-paying stocks.
Now, at first glance, when investors hear dividend yield funds, they think that these funds will pay regular dividends.
But the name “dividend” does not mean the fund pays you regular dividends. It refers to the kind of stocks the fund invests in.
If you want the fund to distribute payouts to you, you’d need to specifically choose the IDCW (Income Distribution cum Capital Withdrawal) option.
List of Dividend Yield Funds in India
As of February 2026, there are 11 dividend yield funds in India.
Here’s the exhaustive list along with their AUM size:
| List of Dividend Yield Funds in India | |
| Scheme Name | AUM(Cr.) |
| Aditya Birla SL Dividend Yield Fund(G) | 1495 |
| Sundaram Dividend Yield Fund(G) | 894 |
| Franklin India Dividend Yield Fund(G) | 2409 |
| UTI Dividend Yield Fund-Reg(G) | 3880 |
| ICICI Pru Dividend Yield Equity Fund(G) | 6531 |
| LIC MF Dividend Yield Fund-Reg(G) | 662 |
| HDFC Dividend Yield Fund-Reg(G) | 5853 |
| Tata Dividend Yield Fund-Reg(G) | 1019 |
| SBI Dividend Yield Fund-Reg(G) | 8987 |
| Baroda BNP Paribas Dividend Yield Fund-Reg(G) | 693 |
| Kotak Dividend Yield Fund-Reg(G) | 221 |
| Source: AMFI, Factsheets | |
SBI Dividend Yield Fund has the largest AUM, followed by ICICI Pru, HDFC, and UTI.
How do Dividend Yield Funds Pick Stocks?
You might assume these funds just screen for the highest dividend-paying companies and call it a day.
But in, the stock selection is more nuanced. And frankly speaking, it seems a little interesting as well.
Each fund house has its own approach. Here’s how the top funds do it:
#1 SBI Dividend Yield Fund
The fund invests at least 65% of assets in companies with established dividend yields but also keeps the door open for businesses that are growing their dividend payouts over time.
So even if the current yields are modest, the stock might make the cut.
#2 HDFC Dividend Yield Fund
This fund takes a broader view of capital return. Companies that do share buybacks in lieu of, or alongside, dividends are also eligible.
The fund considers any company that has paid a dividend or executed a buyback in at least one of the last three years.
#3 UTI Dividend Yield Fund
This fund uses dividend yield as the primary screening filter, then runs a secondary analysis on fundamentals.
The fundamentals include quality of cash flow generation, management track record, and earnings growth trajectory.
The common thread among these is that dividend is a starting point, not the finish line.
Why Betting on Dividend-Paying Companies Makes Sense
High-quality dividend-paying companies tend to share certain traits: strong, recurring cash flows, disciplined capital allocation, and the confidence to reward shareholders rather than hoard cash.
But here’s the part most investors overlook: the real magic of dividend investing comes from holding these stocks long-term.
Let’s understand this with an example.
Suppose that a company earns Rs 1 bn in profit with a 10% dividend payout ratio. Its profit grows 12% per annum, and the stock price compounds at 15% per annum.
Now, in this example, the investor who bought the stock of the company in year 1 at Rs 500 would receive Rs 28 per share in year 10. That’s a yield of 5.6% on their original cost.
And over the full decade, the investor collects Rs 175 in cumulative dividends, a 35% return on invested capital from dividends alone.
This is before even accounting for stock price appreciation. That’s the power of investing in dividend-paying companies or dividend-yield funds.
| Year | Net Profit (Rs Cr) | Dividend Payout (Rs Cr) | No. of Shares | Dividend/Share (Rs) | Stock Price (Rs) | Dividend Yield (%) |
| Year 1 | 100 | 10 | 1,00,00,000 | 10 | 500 | 2 |
| Year 2 | 112 | 11 | 1,00,00,000 | 11 | 575 | 1.9 |
| Year 3 | 125 | 13 | 1,00,00,000 | 13 | 661 | 1.9 |
| Year 4 | 140 | 14 | 1,00,00,000 | 14 | 760 | 1.8 |
| Year 5 | 157 | 16 | 1,00,00,000 | 16 | 875 | 1.8 |
| Year 6 | 176 | 18 | 1,00,00,000 | 18 | 1,006 | 1.8 |
| Year 7 | 197 | 20 | 1,00,00,000 | 20 | 1,157 | 1.7 |
| Year 8 | 221 | 22 | 1,00,00,000 | 22 | 1,330 | 1.7 |
| Year 9 | 248 | 25 | 1,00,00,000 | 25 | 1,530 | 1.6 |
| Year 10 | 277 | 28 | 1,00,00,000 | 28 | 1,759 | 1.6 |
| Considering 12% profit growth pa, 15% stock price appreciation | ||||||
3 Reasons Why Dividend Yield Funds Have Outperformed Flexi Cap Funds
As we discussed at the start, Dividend yield funds have outperformed the largest category in the Indian MF space, Flexi-cap funds, over different long-term time frames.
Here are three key reasons why this has happened:
#1 Smaller AUM = More Tactical Freedom
With a total category AUM of a little over Rs 330 bn, dividend-yield funds can maneuver in ways that flexi-cap funds, managing over Rs 5 trillion, simply cannot.
Flexi-cap fund large-cap exposure has stayed in a narrow 63%-66% band. Dividend-yield funds, by contrast, have ranged from 54% to 67% in large caps, and from 25% to 36% in mid and small caps.
That wider operating range allows fund managers to make bold calls and be rewarded when those calls pay off.
#2 Higher Mid and Small-Cap Exposure During Bull Runs
When the Indian mid and small-cap rally ran hot in 2021 and 2023, dividend-yield funds were better positioned to ride the wave.
| Large-cap Exposure of Funds | ||
| Year | Dividend-Yield Funds (%) | Flexi-Cap Funds (%) |
| 2021 | 57.22 | 62.9 |
| 2023 | 61.61 | 67.18 |
Source: Ace MF, AMFI Factsheets
Lower large-cap exposure in these years meant proportionally higher allocations to mid and small caps, the segments that outperformed.
Flexi-cap giants, weighed down by their AUM, had to stay anchored to large caps.
#3 Average Market-Cap Allocation Breakdown (Last 5 Years)
Over the last 5 years, dividend-yield funds have maintained an average large-cap exposure of about 62%, with the remaining roughly split between midcaps (15%) and small caps (15%).
Flexi-cap funds averaged closer to 65% in large caps, with 14-15% in midcaps and only 11% in smallcaps.
That small difference in small-cap exposure compounds meaningfully when smallcaps go on a multi-year run.
Should You Switch to Dividend Yield Funds?
The answer to this depends on what you’re trying to achieve. If your current flexi-cap fund is performing well and aligns with your long-term goals, there’s no compelling reason to disrupt that.
But if you’re looking to add a quality-tilted, income-oriented equity option to complement your existing holdings, dividend-yield funds deserve serious consideration.
And if you are more sensitive to portfolio drawdowns, dividend-yield funds’ downside protection characteristics may suit your temperament.
Also, this editorial measures category-level averages. Individual fund selection matters more than ever, and the difference between the best and worst performers within each category can be substantial.
Conclusion
Dividend yield funds are no longer a niche curiosity. The data makes a compelling case: better short-term returns, meaningful downside protection, and a more flexible allocation profile than their AUM suggests.
Their underexplored status is, paradoxically, one of their biggest advantages.
However, like all equity funds, these are not a replacement for financial planning. The right fund for you is the one that matches your time horizon, risk comfort, and goals.
Happy investing.
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