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Best Dividend yield funds are a class of mutual funds that predominantly invest in securities that are known to provide regular dividends. We have covered the following in this article:
Dividend yield funds are a type of mutual funds that invest mostly in companies that have the potential to provide regular dividend payout. As per the norms of the Securities and Exchange Board of India (SEBI), a dividend yield fund invests at least 65% of its portfolio in dividend-yielding instruments.
Dividend yield mutual funds are further classified based on the equity exposure of the funds. If the fund is having an equity exposure of more than 65%, then it is classified as a dividend-yielding equity fund. If not, then the fund is classified as a dividend-yielding debt fund.
The following table shows the top-performing dividend yield funds as per the last 5-year returns:
The main intention of the dividend yield funds is to provide investors with regular dividends. This is made possible by the fund manager by investing mostly in the securities of companies that have the potential to offer regular payout. However, the dividends are not guaranteed and are subject to market performance.
The name of the class of the mutual funds only implies the strategy that the fund manager adopts rather than the actual performance of the funds. The fund manager and his team of researchers and analysts pick only those companies that are in line with the objective of the fund.
Investors that are looking to earn a regular income should consider investing in a dividend yield fund. The dividends yielded by this class of mutual funds may not be significant, but no income can be ignored. However, as mentioned earlier, the dividend payout cannot be guaranteed and depends entirely on the performance of the underlying companies and market movements.
These funds are ideal for first-time equity investors as the underlying companies that these funds invest in are much stabler and are capable of sailing through the volatile market scenario. Even during the market lows, the underlying companies of dividend yield funds provide some dividend payout.
After the amendments made in the Union Budget 2020, the dividends offered by mutual funds are now taxed in the hands of investors as per the income tax slab they fall under. The rate of taxation of capital gains offered by these funds depends on the holding period and the type of equity exposure.
If the equity exposure is more than 65%, then the rules of taxation of equity funds apply. If not, then the rules of taxation of debt funds apply. Therefore, you have to be mindful of equity exposure before you invest. This helps you in planning your taxes better.
The following are the most significant advantages of dividend yield mutual funds: