When you invest in mutual funds, you broadly have two options – growth and dividend option (now known as the Income Distribution cum Capital Withdrawal or IDCW option).
When you choose the IDCW option or the dividend option, the mutual fund house may decide to share the income or gains made from the underlying portfolio of the scheme with its unitholders. This distribution is, technically, a withdrawal of capital.
The growth option, on the other hand, does not involve any such distribution until redemption. Your hard-earned money remains invested in the scheme and continues to grow.
Thus, the Net Asset Value (NAV) of the growth option of a scheme is higher than IDCW or the dividend option, as in the latter, the payout to investors is adjusted in the NAV.
In this editorial, we explain all you need to know about dividend-paying mutual funds.
You see, there exists a misconception that dividends in mutual funds are similar to dividends in stocks.
Reality of Mutual Fund Dividends
Unlike stock investing, where dividends are directly paid out to investors, mutual funds do not directly pay out any dividends.
When an equity mutual fund scheme receives dividends from the stocks in its underlying portfolio, the money is usually reinvested to benefit from compounding.
What the fund house does is distribute some income from its portfolio to investors. This income distribution (erstwhile called dividend) is not guaranteed.
To ensure clarity and avoid confusion, the capital market regulator directed fund houses to rename the dividend option in mutual funds to the IDCW option.
So there is no such thing as ‘best dividend-paying mutual funds’.
But if you are someone looking at investing in schemes that target dividend yields (which is a potentially profitable strategy), then you can consider dividend yield funds.
What are Dividend Yield Funds?
They are a subcategory of diversified equity funds mandated to invest at least 65% of their total assets in equity & equity-related instruments of dividend-yielding companies.
These are companies that have good dividend payout history and whose dividend yields are attractive.
Other than that, fund managers of dividend yield funds also give importance to parameters such as business fundamentals, industry outlook, absolute as well as relative valuations, growth outlook, and corporate governance.
They are companies with steady growth in earnings, stable and scalable business models, and in a mature growth phase with high cash flows. These companies can share their profits in the form of dividend payouts almost consistently.
It’s because of these traits that dividend yield stocks are usually less volatile than growth stocks.
Divided yield stocks are mostly largecaps and, to an extent, midcaps. Use Equitymaster’s screener to know which are the high dividend yield stocks in India.
If you want to enjoy a good exposure to dividend yield stocks, at present, there are 10 dividend yield funds in India:
- Adity Birla Sun Life Dividend Yield Fund
- Baroda BNP Paribas Dividend Yield Fund
- Franklin India Dividend Yield Fund
- HDFC Dividend Yield Fund
- ICICI Prudential Dividend Yield Fund
- LIC MF Dividend Yield Fund
- SBI Dividend Yield Fund
- Sundaram Dividend Yield Fund
- Tata Dividend Yield Fund
- UTI Dividend Yield Fund
Some have a longer performance track record (over 3 years), while some have been launched in recent years.
The broader investment objective of these funds is to provide capital growth and income by investing primarily in a well-diversified portfolio of dividend-paying companies that have a relatively higher dividend yield.
They usually benchmark their performance against the Nifty 500 – TRI or the Nifty Dividend Opportunities 50 index.
High dividend-paying companies, often considered defensive bets, are attractive in a high-inflation environment, given their stable cash flows and potential dividends.
Having said that, do note that companies — even the big ones — do not necessarily declare dividends year after year. In certain years, they could plough back the profits for future growth.
Also, if government policies change and they see poor earnings visibility, they may not declare dividends.
Besides, if the fund has exposure to growth-oriented stocks, it may not earn dividends from those.
Portfolio Characteristics of Dividend Yield Funds
| Scheme Name | Scheme PE (x) | Scheme PBV (x) | Scheme Dividend Yield (%) |
| Aditya Birla SL Dividend Yield Fund | 25.93 | 6.28 | 2.57 |
| Baroda BNP Paribas Dividend Yield Fund | 33.22 | 7.10 | 1.65 |
| Franklin India Dividend Yield Fund | 21.94 | 4.57 | 2.95 |
| HDFC Dividend Yield Fund | 32.93 | 5.11 | 1.65 |
| ICICI Pru Dividend Yield Equity Fund | 28.73 | 5.15 | 1.63 |
| LIC MF Dividend Yield Fund | 35.31 | 5.79 | 1.05 |
| SBI Dividend Yield Fund | 29.92 | 7.74 | 2.13 |
| Sundaram Dividend Yield Fund | 26.31 | 5.14 | 2.69 |
| Tata Dividend Yield Fund | 37.56 | 6.31 | 1.25 |
| UTI Dividend Yield Fund | 28.98 | 5.89 | 2.25 |
| NIFTY 500 – TRI | 23.80 | 3.54 | 1.21 |
| NIFTY DIV OPPS 50 – TRI | 14.20 | 2.76 | 3.25 |
Data as of 2 September 2025
Source: ACE MF, NSE
The data reveals that at present, the PE and PB ratios of dividend yield funds have been higher than those of their benchmark index for most funds. In comparison, their dividend yields are lower.
This indicates that the fund houses don’t rely solely on valuations and high dividend yield but also allocate to relatively expensive growth stocks.
Given that if you are considering dividend yield funds, it is important to have a high-risk appetite and an investment horizon of around 5 years.
If you are a senior citizen, don’t depend on dividends from mutual funds.
There is no certainty that a mutual fund scheme will declare a dividend every year. Thus, if you are dependent on them, your cash flow (to meet retirement expenses) may be impacted.
Instead, if you have allocated around 25% to 30% to diversified equity mutual funds for your retirement, opt for the Systematic Withdrawal Plan (SWP).
This facility offered by mutual funds can help you create a steady cash-inflow stream for your retirement needs.
By following the 4% p.a. withdrawal rate thumb rule and withdrawing annually, you could comfortably meet your retirement needs. Your remaining investment would hold the potential to grow over a period of time.
But be mindful that withdrawals from mutual funds may be subject to capital gain tax.
Taxation of IDCW or Dividend
The IDCW or dividends received are taxable as per your income tax slab.
If the amount of IDCW or dividend paid/credited in respect of units of a mutual fund is below Rs 5,000 in a financial year, there is no tax deduction at source (TDS). But in the case of NRIs, TDS at 20% does apply.
Conclusion
Don’t get carried away or be under the misconception of investing in the best dividend-paying mutual funds. In reality, there is no such thing, and it is unlike investing in stocks.
Select your mutual funds – or any other investment – thoughtfully, considering your risk profile, investment objective, goals you are addressing, the liquidity/cashflow needs, and time horizon.
Happy investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here…
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