Dividend Paying Mutual Funds: Meaning, Advantages & How to Invest
Dividend mutual funds are becoming an increasingly attractive option for investors in India who seek regular income and capital growth. These funds invest in shares of companies known for paying dividends, providing a consistent source of income alongside potential appreciation in value. In the context of the Indian financial market, dividend mutual funds appeal to those who prefer stability and a predictable cash flow, even amid fluctuating market conditions. This article will explore what dividend funds are, their benefits, risks and how to invest in them.
Best Dividend Mutual Funds in India Based on Absolute Returns – 1Y
| Fund Name | AUM (in cr) | Expense Ratio (%) | Absolute Returns - 1Y (%) | 3Y CAGR (%) |
|---|---|---|---|---|
| LIC MF Dividend Yield Fund | 437.39 | 1.22 | 46.75 | 19.27 |
| UTI Dividend Yield Fund | 4,198.08 | 1.41 | 41.64 | 16.58 |
| ICICI Pru Dividend Yield Equity Fund | 4,875.15 | 0.57 | 38.50 | 23.51 |
| Templeton India Equity Income Fund | 2,554.11 | 1.22 | 37.14 | 19.29 |
| Aditya Birla SL Dividend Yield Fund | 1,539.79 | 1.37 | 34.10 | 20.55 |
| HDFC Dividend Yield Fund | 6,124.17 | 0.65 | 31.41 | 20.02 |
| Sundaram Dividend Yield Fund | 988.87 | 0.99 | 31.00 | 16.26 |
| SBI Dividend Yield Fund | 9,347.38 | 0.75 | 30.42 | 0.00 |
| Tata Dividend Yield Fund | 994.96 | 0.69 | 25.44 | 16.15 |
| Baroda BNP Paribas Dividend Yield Fund | 1,047.64 | 0.42 | 0.00 | 0.00 |
Note: The data on the top monthly dividend paying mutual funds in India in the list is from 14th November 2024 and is derived from Tickertape Mutual Fund Screener.
🚀 Pro Tip: You can use Tickertape’s Stock Screener to research and evaluate stocks with over 200+ filters and parameters.
Overview of the Best Dividend Yield Mutual Funds
LIC MF Dividend Yield Fund
LIC MF Dividend Yield Fund is an equity mutual fund scheme launched by LIC Mutual Fund. The scheme was made available to investors on 3rd December 2018. The fund has an AUM of Rs. 437.39 cr. as of 14th November 2024. The expense ratio of the fund is 1.22%. The CAGR for 3-yr and 5-yr is 19.27% and 23.46%. Furthermore, the minimum lumpsum investment required in this fund is Rs. 5,000.
UTI Dividend Yield Fund
It is an open-ended equity scheme predominantly investing in dividend-yielding stocks. The fund is launched by UTI Mutual Fund. The fund has been active since 3rd May 2005. As of 14th November 2024, the fund has an AUM of Rs. 4,198.08 cr. and has an expense ratio of 1.41%. The minimum investment in UTI Dividend Yield Fund Regular Plan Growth is Rs 5,000 and the minimum SIP is Rs. 500. Furthermore, the fund has a 3-yr CAGR of 16.58% and a 5-yr CAGR of 22.14%.
ICICI Pru Dividend Yield Equity Fund
Launched on 16th May 2014, the ICICI Pru Dividend Yield Equity Fund is an equity mutual fund scheme. ICICI Prudential Mutual Fund introduced it. The fund provides medium to long-term capital gains and/or dividend distribution by predominantly investing in a diversified portfolio of equity and equity-related instruments. As of 14th November 2024, the AUM of the fund is Rs. 4,875.15 cr. and has an expense ratio of 0.57%. The fund’s 3-yr CAGR is 23.51%, and the 5-yr CAGR is 27.24%. Furthermore, the minimum lumpsum investment required in this fund is Rs. 5,000.
Templeton India Equity Income Fund
Templeton India Equity Income Direct is a dividend yield mutual fund scheme from Franklin Templeton Mutual Fund. For the last 12 years, this fund has consistently declared dividends every year. The fund was launched on 18th May 2006. As of 14th November 2024, the fund has an AUM of Rs. 2,554.11 cr. and has an expense ratio of 1.22%. It has demonstrated strong performance with a CAGR of 19.29% over the past 3-yr and 25.79% over the past 5-yr. Furthermore, the minimum lumpsum investment amount for the fund is Rs. 5,000.
Aditya Birla SL Dividend Yield Fund
Aditya Birla SL Dividend Yield Fund is an open-ended equity mutual fund scheme launched by Aditya Birla Sun Life Mutual Fund. The scheme was made available to investors on 26th February 2003. As of 14th November 2024, the AUM of the fund is Rs. 1,539.79 cr. and has an expense ratio of 1.37%. The fund’s 3-yr CAGR is 20.55%, and the 5-yr CAGR is 23.99%. The minimum lump sum investment amount is Rs. 1,000.
HDFC Dividend Yield Fund
HDFC Dividend Yield Fund is a dividend yield mutual fund scheme from HDFC Mutual Fund. The scheme focuses on dividend-yielding stocks that have paid dividends or conducted a buyback in at least one of the last three financial years. As of 14th June 2024, this fund has an AUM of Rs. 6,124.17 cr. The expense ratio is 0.65%. It has recorded a 3-yr CAGR of 20.02%. Additionally, the minimum lumpsum amount is Rs. 100.
Sundaram Dividend Yield Fund
This fund was launched on 15th October 2004 by Sundaram Mutual Fund. As of 14th November 2024, the AUM of the fund is Rs. 988.87 cr. The fund has an expense ratio of 0.99%, which is relatively close to its peers. The 3-yr CAGR is 16.26%, and the 5-yr CAGR is 20.86%, indicating a steady performance. Thus, the minimum lumpsum amount is Rs. 5,000.
SBI Dividend Yield Fund
Launched on 14th March 2023, the SBI Dividend Yield Fund is a dividend yield mutual fund scheme from SBI Mutual Fund. As of 14th November 2024, the AUM of the fund is Rs. 9,347.38 cr. Its expense ratio is 0.75%, relatively lower than its peers. The lower expense ratio may result in better returns over the long term. The fund has absolute 1-yr returns of 30.42%. The minimum lumpsum amount for this fund is Rs. 5,000.
Tata Dividend Yield Fund
Tata Dividend Yield Fund is an open-ended equity scheme launched by Tata Mutual Fund. As of 14th November 2024, the AUM of the fund is Rs. 994.96 cr. The fund’s expense ratio is 0.69%, relatively less than other thematic-dividend yield funds charge. The fund has achieved a 3-yr CAGR of 16.15%. The minimum lumpsum amount is Rs. 5,000.
Baroda BNP Paribas Dividend Yield Fund
Baroda BNP Paribas Dividend Yield Fund is an open-ended equity scheme that primarily invests in stocks with a high dividend yield. The fund aims to achieve capital appreciation and generate income by investing in a diversified portfolio of high dividend-yielding companies across various sectors. As of 14th November 2024, the AUM of the fund is Rs. 1,047.64 cr. The fund’s expense ratio is 0.42%. The fund requires a minimum lumpsum investment of Rs. 1000.
What are Dividend Yield Funds?
Dividend yield mutual funds are investment funds that focus on picking companies that can pay regular dividends to their shareholders. These funds target companies or assets that distribute a portion of their earnings to investors as dividends. So, by investing in these funds, you’re looking to gain from both the investments’ value growth and a steady flow of dividends. It’s like getting the best of both worlds – potential for growth and consistent earnings.
How Do Dividend Mutual Funds Work?
A high dividend mutual fund often invests in equities that can pay high dividends. This strategy offers investors a steady income stream and the potential for capital appreciation. The funds’ managers actively select dividend stocks, aiming to strike a balance between consistent payouts and the potential for growth.
In a nutshell:
- The fund manager selects stocks that have a history of paying dividends and are likely to continue to do so in the future.
- The frequency of dividend payments can vary from fund to fund. However, mostly the best dividend mutual funds pay dividends quarterly.
- The dividends that high dividend paying mutual funds pay can also vary.
Types of Dividends in Mutual Funds
Mutual funds distribute income to investors through dividends and other payouts derived from the earnings of their portfolio holdings. These earnings come from dividends paid by stocks and interest from bonds in the fund. Understanding the types of dividends in mutual funds helps investors choose funds that align with their financial goals. Here’s a look at the main types:
- Regular Dividends: Regular dividend paying mutual funds are periodic payouts, often made quarterly or annually, based on the income earned from the fund’s holdings. Regular dividends provide consistent income, making them ideal for investors seeking steady cash flow.
- Special Dividends: These one-time distributions occur during periods of strong fund performance or when there is excess cash. Special dividends are typically larger than regular ones and signal robust earnings.
- Capital Gain Distributions: When a fund manager sells securities in the portfolio at a profit, the gains are distributed to investors, usually at the end of the financial year. While not technically dividends, they provide additional income and may be subject to taxation.
- Reinvestment Option: Investors can reinvest dividends to buy more units of the mutual fund instead of taking cash payouts. This option supports compounding and helps build wealth over the long term.
How to Invest in Dividend Funds?
Investing in a dividend yield mutual fund through a mutual fund account is a straightforward process that can be accomplished by following these steps:
Step 1: Access your MF account platform by logging in.
Note: If you don’t have an existing account, you can quickly open a demat account by providing the necessary documentation and details.
Step 2: Identify the best dividend paying mutual funds that aligns with your financial objectives and risk tolerance. During this phase, you can consider the following factors:
- Search for the specific fund you wish to invest in.
- Evaluate the fund’s historical performance, tax implications, and more. This can help you create a better understanding of the chosen fund.
- Assess the fund’s risk level, ratings, and expense ratio. This can help you make more informed decisions about which funds are the best fit for your investment goals and risk tolerance.
Step 3: After you have selected the dividend yield fund(s) you want to invest in, access your account and navigate to the Mutual Funds section. Next, make the following decisions:
- Choose whether to invest through a Systematic Investment Plan (SIP) or make a one-time investment.
- If you choose to invest via SIP, determine your monthly SIP date, input the desired investment amount, and select the preferred payment method.
The key is to thoroughly research and evaluate the dividend yield mutual fund before investing, taking into account factors like performance, risk, and costs. This will help you make an informed decision aligned with your financial goals and risk tolerance.
What are the Features of Dividend Yield Mutual Funds?
Here are some of the key features of the best dividend mutual funds India
- Asset Allocation: As per SEBI regulations, these funds are required to allocate a minimum of 65% of their assets in equity and equity-related instruments.
- Investment Corpus: The best monthly dividend paying mutual funds primarily allocate most of their funds into stocks that yield dividends, indicating that the companies owning these stocks consistently provide higher-than-average profits.
- Risk-reward Ratio: The primary focus of the best monthly dividend mutual funds lies in the stock market, making their performance sensitive to market ups and downs. However, compared to other equity-related schemes, dividend mutual funds are relatively less volatile. As always, it is worthwhile to consult a professional before investing.
Advantages of Investing in Dividend Funds in India
Let’s look at the advantages of investing in the best mutual fund dividends:
- Equity Exposure with Lower Risk: The highest dividend paying mutual funds are comparatively less impacted by market volatility than other equity-oriented mutual fund schemes. Therefore, investors who are looking out for investments that provide equity exposure with less risk, can opt for these types of funds.
- High Return Potential: Dividend yield funds, including monthly dividend mutual funds India, invest in companies with a strong financial track record as they can generate potential high returns over time.
- Steady Income: The best dividend paying mutual funds in India can often provide a steady stream of income through regular dividend payouts. This makes them appealing to investors seeking consistent returns.
Returns on Dividend Yield Mutual Funds & How to Calculate It?
Dividend Yield Mutual Funds are a popular choice among investors seeking regular income from their investments. These high dividend mutual funds primarily invest in dividend-paying stocks, making them an attractive option for income-oriented investors. Here’s an insight into the returns you can expect from these funds and how to calculate them:
Calculating Dividend Yield
To calculate the dividend yield, use the formula:
Dividend Yield (%) = (Annual Dividend Per Share / Current Market Price) x 100
Where,
- Annual Dividend Per Share is the sum of all dividends received over a year.
- Current Market Price is the prevailing market price of the mutual fund.
Let’s take an example to understand this better.
Assume the annual dividend per share for a particular mutual fund is Rs. 5 and the current market price of the fund’s units is Rs. 100.
Now, let’s apply the above-mentioned formula:
Dividend Yield (%) = (Annual Dividend Per Share / Current Market Price) x 100
Dividend Yield (%) = (Rs. 5 / Rs. 100) x 100
= 0.05 x 100
= 5%
In this example, the dividend yield of the mutual fund is 5%. This means that for every Rs. 100 invested in the fund, you receive Rs. 5 as an annual dividend, which translates to a 5% return based on the current market price of the share.
However, it’s important to note that the returns may vary depending on the fund’s underlying assets and market conditions.
Who Should Invest in Dividend Yield Mutual Funds?
Dividend mutual funds can be suitable for investors who prioritise regular income alongside potential capital appreciation. It can also be considered appropriate for those seeking equity exposure with a moderated level of risk.
Additionally, dividend mutual funds can also be an excellent option for low-risk appetite investors entering the equity market. The risk of dividend yield is potentially lower than any other equity mutual fund scheme, which makes them low-risk funds that are notably more stable and can navigate through market volatility.
Risks of Investing in Dividend Mutual Funds
When searching for top dividend yield mutual funds, consider these potential risks:
- Higher Taxes: Dividends received from dividend giving mutual funds are taxed as per the investor’s income tax slab, unlike growth-oriented funds where taxes are deferred until redemption. This can reduce the overall post-tax returns for investors in higher tax brackets.
- Returns Vary Based on Performance: While these funds are relatively less volatile due to their underlying investments, returns remain subject to market fluctuations and aren’t guaranteed.
- Inherit Mutual Fund Risk: Market risk, credit risk, interest rate risk, liquidity risk, and concentration risk are all potential pitfalls that can impact the performance and returns of a mutual fund. Thus, it is important to carefully analyse the associated risks before investing.
Taxation on Dividends as per the Union Budget for 2024-25
The Union Budget 2024-25 has changed how dividends from mutual funds are taxed. Investors interested in the highest dividend paying stocks can find it helpful to learn about these changes that include:
- Tax Deducted at Source (TDS): The 20% TDS on the repurchase of mutual fund units has been removed. This means investors will get the full amount at redemption. However, they must calculate and pay the correct capital gains tax when filing their income tax returns.
- Dividend Income: Dividends from mutual funds are now taxed according to the investor’s income tax slab rate. This shift moves the tax burden from mutual fund companies to individual investors.
- Foreign Dividends: Dividends from foreign mutual funds or companies are taxable in India. Investors can be taxed at a flat rate of 20% or their income tax slab rate. If taxes are paid in the foreign country, relief may be available under double taxation agreements.
These changes mean investors can receive dividend income without TDS but must report it correctly in their tax filings and pay taxes according to their slab rates. While this simplifies cash flow, it requires careful tax planning.
Factors to Consider While Investing in Dividend Yield Mutual Funds
To discover top dividend yield mutual funds, prioritise below-mentioned factors:
- Risk Tolerance: For conservative investors who prioritise portfolio stability may want to consider funds with a higher allocation to large-cap equities. This is because the primary goal is to reduce risk by investing in a program with lower potential hazards.
- Investment Tenure: Like other mutual funds, it’s important to consider the time period for which the fund has been existing. A dividend yield that has been through the stock market’s bull and bear phases can offer better returns in comparison to new companies. On the other hand, newly launched companies may boast impressive performance during periods of market highs, but to ensure long-term gains, the investor must overview the fund’s tenure and performance in various market cycles.
To Wrap It Up…
Dividend mutual funds can be a good option for investors who are looking for regular income and tax benefits. However, it is important to choose a fund that is right for your investment goals and risk tolerance. While it may provide substantial returns during bullish periods, the returns can experience a significant decline in bearish market conditions. Therefore, it is advisable to do your own research and/or consult a financial advisor before investing.
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Frequently Asked Questions(FAQs) on Dividend Mutual Funds
Based on absolute 1-yr return, here are the top 5 dividend mutual funds in India for 2024:
(a) LIC MF Dividend Yield Fund
(b) UTI Dividend Yield Fund
(c) ICICI Pru Dividend Yield Equity Fund
(d) Templeton India Equity Income Fund
(e) Aditya Birla SL Dividend Yield Fund
Note: This list is for educational purposes and is not recommendatory.
Mutual fund companies have the discretion to distribute dividends to investors. They may sometimes pay out dividends even if the fund’s portfolio hasn’t generated any profits. When a mutual fund pays a dividend, the fund’s net asset value (NAV) is reduced by the same amount.
Investing in dividend yield funds can be a good option for investors who are looking for a regular source of income. These funds can also be suitable for investors who want to invest in equity but are looking for low-volatility. However, aggressive growth-seekers should approach it with caution.
Dividend refers to the total amount of money a company pays out to its shareholders as dividends. On the other hand, dividend yield is the percentage of the stock price that a company returns to its shareholders.
Yes, it is possible. While dividend reinvestment can potentially increase the number of shares an investor owns, the final outcome is heavily dependent on the fund manager’s discretion and the specific guidelines of the fund type.
