Do you want a mutual fund scheme that gives you regular income along with investment? If yes, then dividend yield mutual funds can be the right choice for you. These funds invest in companies that give a part of their profits to investors in the form of dividends. That is, you get not only capital growth on your investment but also regular income from time to time.
What are dividend yield mutual funds?
Dividend yield mutual funds mainly invest in shares of companies that give regular dividends. Such companies usually have strong balance sheets and stable business models, due to which their performance remains stable despite high volatility in the market.
In the short term (1, 3, 6 months), almost all mutual fund categories have given average negative returns. If we look at 1-year average returns of small-cap, mid-cap, large-cap, and other key categories, most of them struggled to touch even 5%.
Since September 2024, the Indian equity market has witnessed multiple bouts of selloff, sending broader indices like BSE small-cap and mid-cap down 23% and 21%, respectively. Instead of tracking their short-term performances, the story will review the returns of dividend-yield funds based on their 5-year yields.
In the last five years, some dividend-yield mutual funds have performed brilliantly and have given investors good returns as well as stable income.
Also read: Top 5 mutual funds with up to 42% CAGR in 5 yrs: Smallcaps win! Rs 10K SIP becomes Rs 12.42 lakh
Here are the top 5 dividend-yield mutual funds that did not disappoint investors:
1. ICICI Prudential Dividend Yield Equity Fund – Direct Plan
5-year annualised returns : 28.85%
Launch date: 16 May 2014
Benchmark: NIFTY 500 TRI
Assets under management (AUM): Rs 4,575 crore
2. Templeton India Equity Income Fund – Direct Plan
5-year annualised returns: 25.74%
Launch date: 1st January 2013
Benchmark: NIFTY 500 TRI
Assets under management (AUM): Rs 2,341 crore
3. Aditya Birla Sun Life Dividend Yield Fund – Direct Plan
5-year annualised returns: 22.75%
Launch date: 1st January 2013
Benchmark: NIFTY 500 TRI
Assets under management (AUM): Rs 1,339 crore
4. LIC MF Dividend Yield Fund – Direct Plan
5-year annualised returns: 21.81%
Launch date: 21st December 2018
Benchmark: NIFTY 500 TRI
Assets under management (AUM): Rs 446 crore
5. UTI Dividend Yield Fund – Direct Plan
5-year annualised returns: 21.69%
Launch date: 1st January 2013
Benchmark: NIFTY 500 TRI
Assets under management (AUM): Rs 3,633 crore
(Data source: Value Research)
Investing in these funds gives you two benefits –
Long-term growth: Since the investment is made in equity, there is a possibility of getting good returns in the long run.
Regular income: A fixed amount is received from time to time in the form of dividends, making it attractive for investors who want regular cash flow.
Benefits of dividend yield mutual funds
Regular income: If you want to earn some money every year from your investment, then these funds can be the right choice.
Low risk: These funds usually invest in companies that are already established and give stable returns, keeping the investment safe.
Long-term growth: By investing in these funds, you also get the benefit of the growth of the equity market, due to which your capital grows over time.
Better performance in a recession: When the market falls, these companies may still do well as investors look for safe options.
Risks of investing in dividend yield mutual funds
Market risk: Since these funds invest in equities, they may also be affected by a market fall.
Dividend not guaranteed: Companies pay dividends based on their profits, but dividends don’t need to be paid at the same rate every year.
Low growth potential: These companies may grow relatively slowly compared to high-growth stocks, which may limit your returns.
Who should invest in dividend yield mutual funds?
Investors planning for retirement: If you want a steady income source after retirement, these funds can be a good option.
Low-risk investors: If you want to invest in the stock market but without taking too much risk, then these funds may be right for you.
Medium to long-term investors: If your investment horizon is 5 to 10 years and you want regular income as well as capital appreciation, then these funds are suitable for you.
Summing up
Dividend yield mutual funds can be an excellent option for investors who want to invest in the stock market but do not want to take too much risk. They not only provide stability even during market downturns but also provide regular income. However, it is important to keep in mind the market risk and uncertainty of dividends before investing. If you want to add a balanced option to your portfolio, then definitely consider dividend-yield mutual funds.