If you are a new investor and exploring new schemes to invest, there are multiple options to choose from. From large cap funds to value funds and ELSS to thematic funds – there are options galore. There is no denying the fact that each category has its own set of advantages and characteristics. Here, we list out the key advantages of investing in dividend yield funds.
It is an interesting category for those investors who want to earn a regular income on their investment.
What are dividend yield funds?
Dividend yield funds refer to mutual funds that invest predominantly in dividend-yielding stocks, with at least 65 per cent in stocks, per Sebi’s categorisation of mutual funds.
“These funds provide an opportunity of potential wealth appreciation to investors while they can have a regular income through dividend payouts. These funds are good for those investors who want to have a regular income stream through dividend payout. That’s why they are good for the retirees and investors who seek for passive income,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.
Dividend yield funds comprise one of the special categories of equity mutual funds which also include value funds, contra funds, focused funds, sectoral/thematic funds and ELSS.
Are these schemes very popular?
These schemes are not very popular. There are only 10 dividend yield mutual fund schemes with total assets under management (AUM) of ₹31,049 crore, as on January 31, 2025, reveals AMFI data.
To put this in perspective, there are 205 schemes in the sectoral fund category with an AUM of ₹4.60 lakh crore, 23 schemes in the value fund category (AUM of ₹1.83 lakh crore), and 43 ELSS (AUM of ₹2.32 lakh crore).
What are the key advantages of investing in them?
I. Regular income: Since these mutual funds invest primarily in the stocks of companies which offer regular dividends, they ensure regular income for investors.
II. Less volatility: Constituent stocks of these funds typically face less volatility than growth stocks. Therefore, they make a good choice for conservative investors.
Which are the best-performing dividend yield funds?
The top-performing dividend yield mutual funds based on the past three years’ returns are as follows:
(Source: AMFI; returns as on March 5, 2025)
Do these funds have limited growth potential?
Unlike value funds and other funds with a higher upside, dividend funds carry a relatively less scope of growth.
“The constituent stocks of dividend yield funds usually have a limited growth potential since the returns are shared as dividend. Additionally, they don’t perform particularly well during the bull market. However, these stocks are not volatile since they have a strong balance sheet. Also, during the reverse interest rate cycle, these schemes offer better returns,” says Sridharan S, a Sebi-registered investment advisor and co-founder of Wealth Ladder Direct.
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