Dividend Yield Mutual Funds offer you the opportunity to invest in companies that have the potential to provide growth through capital appreciation as well as regular income through dividends. In this article, we have enlisted PersonalFN’s list of the 3 best Dividend Yield Mutual Funds to invest in 2023.
What are Dividend Yield Mutual Funds?
Dividend Yield Mutual Funds are actively managed equity-oriented mutual funds that are mandated to invest a minimum of 65% of their assets in equity & equity-related instruments of dividend-yielding companies. These schemes may also invest in companies that choose to buy back shares (an effective mean of rewarding shareholders) in addition to or as an alternative to dividends.
Examples of Dividend Yield Mutual Funds in India
| Scheme Name | AUM (Rs Crore) |
| HDFC Dividend Yield Fund | 2,994 |
| UTI Dividend Yield Fund | 2,787 |
| Templeton India Equity Income Fund | 1,351 |
| ICICI Pru Dividend Yield Equity Fund | 1,258 |
| Aditya Birla SL Dividend Yield Fund | 850 |
| Tata Dividend Yield Fund | 471 |
| Sundaram Dividend Yield Fund | 383 |
| IDBI Dividend Yield Fund | 85 |
Data as of February 28, 2023
(Source: ACE MF)
The performance benchmark index of the fund is the Nifty Dividend Opportunities 50 TRI Index. The constituents of the Nifty Dividend Opportunities 50 index are selected from within the top 300 companies based on the average free-float market capitalisation.
To select stocks, the fund managers of Dividend Yield Mutual Funds usually focus on stocks that have generated higher compared to indices such as Nifty 50 or Sensex. Apart from dividend yield, the fund managers also give importance to parameters such as business fundamentals, industry outlook, absolute as well as relative valuations, growth outlook, and corporate governance.
Does it make sense to invest in Dividend Yield Mutual Funds in 2023?
The equity market is expected to be highly volatile in the year 2023 due to various headwinds such as elevated inflation levels, fears of global slowdown, shrinking profitability of India Inc. etc. Any other unforeseen event may also negatively impact the growth of equities.
Dividend Yield Funds tend to perform relatively better during tough market conditions due to the stable business models of dividend-yielding companies.
Do note that dividend yield is a reliable indicator of a company’s valuation. A high dividend-yielding stock represents good cash flows from business operations, supports higher return on equity, and the management’s commitment towards its shareholders. As a result of these strengths, dividend-yielding stocks tend to be less volatile and hence, less risky. Thus, Dividend Yield Mutual Funds can be a worthy addition to your portfolio in 2023.
Top holdings of Dividend Yield Mutual Funds
Data as of February 28, 2023
(Source: ACE MF)
Who should invest in Dividend Yield Mutual Funds?
Investing in dividend yield stocks provides you with an opportunity to grow wealth in the form of capital appreciation and dividend payouts of the company. Only the companies with steady growth in earnings, stable and scalable business models and are in a mature phase with high cash flows can manage to share profits in the form of dividend payouts on a consistent basis.
Thus, dividend yield stocks offer downside risk protection during volatile markets and are considered a good option in uncertain times. But since selecting such high-dividend yield stocks for an investor directly may not be easy, you may consider investing in dividend yield stocks through mutual funds.
Dividend Yield Funds are suitable for investors with moderate risk appetite. One should have an investment horizon of at least 3-5 years before investing in Dividend Yield Funds.
But remember that corporates are not mandated to payout dividends consistently year after year, even if they are making profits. Further, poor earnings visibility, change in government policies, change in tax structure, etc., can affect dividend payouts.
How are Dividend Yield Mutual Funds taxed?
Unlike dividends from direct equity investment, where dividend is taxed in the hands of the shareholders, dividend received at the mutual fund scheme level is tax-free. The income earned on units under the Growth option continues to remain invested and is reflected in their Net Asset Value (NAV).
Investors are only liable to pay capital gains tax depending on the tenure of their holding. Dividend Yield Funds follow the equity mutual fund taxation. The short-term holding period for Dividend Yield Funds from a tax perspective is 12 months. So, if you sell your Dividend Yield Fund units before 12 months, you pay short-term capital gains (STCG) tax of flat 15% on the gains.
On the other hand, if you sell your Dividend Yield Fund units after completing one year, you pay a long-term capital gains tax of 10%, but only if your gains exceed Rs 1 Lakh in a financial year. If your long-term gains are below Rs 1 Lakh and you redeem after completing one year, then you do not have to pay any tax on these gains.
Which are the best Dividend Yield Mutual Funds to invest in 2023?
Let us now look at the best Dividend Yield Mutual Funds to invest in 2023.
Best Dividend Yield Mutual Funds to Invest in 2023
| Scheme Name | Absolute (%) | CAGR (%) | Ratios | ||||
| 1 Year | 3 Years | 5 Years | 7 Years | Scheme PE (x) | Scheme PBV (x) | Scheme Dividend Yield (%) | |
| ICICI Pru Dividend Yield Equity Fund | 8.97 | 36.31 | 11.74 | 15.84 | 24.07 | 3.37 | 2.27 |
| Templeton India Equity Income Fund | 8.18 | 34.95 | 14.23 | 16.86 | 17.47 | 4.07 | 4.50 |
| Sundaram Dividend Yield Fund | 3.46 | 24.92 | 11.51 | 16.12 | 29.86 | 5.45 | 2.84 |
| Nifty Dividend Opportunities 50 – TRI | 8.05 | 29.82 | 11.55 | 15.10 | 16.09 | 3.22 | 3.75 |
| Nifty 50 – TRI | 1.26 | 24.12 | 12.10 | 13.80 | 20.39 | 4.05 | 1.44 |
| Nifty 500 – TRI | 0.02 | 24.91 | 10.98 | 13.94 | 21.21 | 3.82 | 1.44 |
Past performance is not an indicator for future returns
Data as of March 16, 2023. Direct plan – Growth option considered
(Source: ACE MF)
Best Dividend Yield Mutual Funds to invest in 2023 #1: Templeton India Equity Income Fund
Launched in May 2006, Templeton India Equity Income Fund invests in companies that have a current or potentially attractive dividend yield by using a value strategy, with the aim to provide a combination of regular income and long-term capital appreciation.
The current dividend yield of the fund is around 4.5%, making it a true-to-name Dividend Yield Fund. The portfolio P/E of the fund is around 17.5x.
As of February 2023, Templeton India Equity Income Fund allocated 53.6% of its assets in large-cap stocks, 10.5% in mid-caps, 8.9% in small-caps, 14.6% in overseas equities and mutual fund units (mainly those that are Taiwan-based), 5.9% in REITs & InvITs, and the balance in cash.
Fund Snapshot – Templeton India Equity Income Fund
Past performance is not an indicator of future returns
Portfolio data as of February 28, 2023
Returns and NAV data as of March 16, 2023. Regular Plan – Growth Option considered
(Source: ACE MF)
The fund’s 10-top stocks accounted for about 42% of the portfolio, making it fairly diversified. It includes names such as Power Grid Corporation, Infosys, NTPC, HCL Technologies, and ITC. Among overseas equities, the fund has invested in Media Tek, Xtep International Holdings, Novatek Microelectronics Corporation, Fila Holdings Corp, and Xinyi Solar Holdings, among others.
Best Dividend Yield Mutual Funds to invest in 2023 #2: Sundaram Dividend Yield Fund
Launched in January 2013, Sundaram Dividend Yield Fund aims to provide long-term capital appreciation and/or dividend distribution by investing predominantly in a well-diversified portfolio of companies that have a relatively high dividend yield.
The current Dividend Yield of the fund is around 2.8%, higher than that of the Nifty 50 – TRI. The portfolio P/E of the fund is around 29.9x, indicating the fund manager doesn’t mind paying a bit more for companies with high dividend yields and long-term value opportunities.
Fund Snapshot – Sundaram Dividend Yield Fund
Past performance is not an indicator of future returns
Portfolio data as of February 28, 2023
Returns and NAV data as of March 16, 2023. Regular Plan – Growth Option considered
(Source: ACE MF)
As of February 28, 2023, the fund allocated 69.6% of its assets in large-caps, 15% in mid-caps, 7.2% in small-caps, and the balance in cash and equivalents. Many of these are held with a buy-and-hold strategy; the fund manager refrained from churning the portfolio frequently.
The top 10 stocks accounted for 39.3% of its assets, comprising mainly of popular large-cap stocks such as Infosys, HDFC Bank, NTPC, ICICI Bank, and ITC, among others.
Best Dividend Yield Mutual Funds to invest in 2023 #3: ICICI Pru Dividend Yield Equity Fund
Launched in May 2014, ICICI Prudential Dividend Yield Equity Fund aims to generate medium to long-term capital gains and/or dividend distribution by predominantly investing in a well-diversified portfolio of equity and equity-related instruments of dividend-yielding companies.
The current dividend yield of the fund is 2.3%, while the P/E at around 24.1x. This again indicates that the fund manager doesn’t mind paying a bit more as it pursues a growth style of investing.
Fund Snapshot – ICICI Pru Dividend Yield Equity Fund
Past performance is not an indicator of future returns
Portfolio data as of February 28, 2023
Returns and NAV data as of March 16, 2023. Regular Plan – Growth Option considered
(Source: ACE MF)
As of February 28, 2023, the fund allocated 74.2% of its assets in large-caps, 5.6% in mid-caps, 11.4% in small-caps, 2.5% in REITs & InvITs, and the balance in cash and equivalents. Many of these are held with a buy-and-hold strategy, but the fund manager often churns a portion of the portfolio to benefit from the available opportunities. The fund prefers to hold a high cash balance if the valuations are unfavourable.
The top 10 stocks accounted for about half of its assets comprising popular Nifty 50 index heavyweights and PSUs such as ICICI Bank, NTPC, Sun Pharma, Infosys, and ONGC, among others.
This article first appeared on PersonalFN here
