Dividend Yield Fund

Dividend yield is calculated as:

Dividend Yield (%) = (Annual Dividend / Current Market Price) × 100

For instance, if a company pays ₹20 per share annually and its stock trades at ₹500, the dividend yield is 4%. Companies with high dividend yields are often financially stable, cash-rich, and have a history of steady profits, making them attractive for conservative equity investors.

In 2025, after stabilising interest rates worldwide and with market volatility still present, dividend yield funds are regaining their place in the market as a defensive investment strategy. They provide consistent cash flows and generally invest in established, low-beta companies that can soften the impact of portfolio losses during market downturns.

Stocks in sectors such as:

• Public sector undertakings (PSUs)
• Utilities
• FMCG
• Oil & Gas
• Large-cap banking

They are typical components of dividend yield fund portfolios. Leading dividend yield funds, such as ICICI Prudential Dividend Yield Equity Fund and Aditya Birla Sun Life Dividend Yield Fund, have demonstrated strong risk-adjusted returns during volatile periods from 2020 to 2024.

• Income and Growth Strategy: The funds invest in dividend-paying stocks that generate revenue and also provide a small capital gain.
• Defensive Nature: These funds tend to perform better even in times of market correction, as dividend stocks are generally less volatile.
• Focus on Fundamentals: Fund managers look for companies that have steady profits, stable cash flow, and minimal debt.
• Lower Valuation Risk: Generally, stocks with high dividend yields are not overvalued, which means they have a safety buffer.

• Steady returns even in sideways or falling markets
• Ideal for conservative investors seeking equity exposure with income
• Reduces portfolio volatility
• Focus on fundamentally strong companies
• Effective for long-term wealth creation with downside protection

• Lower returns in bull markets compared to aggressive growth or midcap funds
• Dividends not guaranteed — payout depends on company performance
• Concentration risk in sectors like utilities, PSUs, and banking
• Inflation risk if dividend growth does not outpace inflation

Here's a brief overview of returns from top dividend yield funds as of mid-2025:

• ICICI Prudential Dividend Yield Equity Fund: ~20.4% CAGR (5Y)
• Templeton India Equity Income Fund: ~17.6% CAGR (5Y)
• Aditya Birla Sun Life Dividend Yield Fund: ~18.2% CAGR (5Y)
• Sundaram Dividend Yield Fund: ~16.5% CAGR (5Y)

Many of these funds have outperformed their large-cap peers in volatile years, such as 2022 and early 2023, primarily due to their exposure to dividend-rich sectors.

Dividend Yield Funds are best suited for:

• Conservative investors who want relatively stable equity returns
• Investors looking for passive income
• Those with a moderate risk appetite
• People nearing retirement or with short- to medium-term goals (5–7 years)
• Investors looking to diversify from high-growth or mid/small-cap strategies

Since these are equity-oriented funds, the taxation is standard:

• Short-Term Capital Gains (STCG): Taxed at 15% if held for less than one year
• Long-Term Capital Gains (LTCG): 10% tax on gains above ₹1 lakh if held for over a year
• Dividends: Taxed at the investor's slab rate; 10% TDS applies if the dividend exceeds ₹5,000 annually

Note: The term "dividend" in these funds refers to underlying stocks in the portfolio. Mutual fund schemes themselves may or may not distribute dividends.

• Large and mid-cap stocks with a dividend yield above the Nifty 50 average
• Public sector undertakings (PSUs)
• Defensive sectors like utilities, power, oil & gas, and FMCG
• Select international stocks with high dividend policies (in hybrid versions)

Fund managers may employ a bottom-up approach to identify companies with strong cash positions and sustainable dividend payout ratios, as well as solid corporate governance.