There seems to be a sudden interest in Dividend yield funds. This could be due to the New fund offer from HDFC Dividend yield fund. What is special about this category? is it worth investing in it? Let us find out.
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Dividend Distribution tax
Objective of the HDFC Dividend Yield fund
Below is a quote from the Scheme Information Document (SID)
To provide capital appreciation and/or dividend distribution by predominantly investing in a well-diversified portfolio of equity and equity related instruments of dividend yielding companies. There is no assurance that the investment objective of the Scheme will be realized.
What do other mutual funds invest in? Do they not try to invest in companies which provide capital appreciation? Do they not invest in well diversified portfolio of companies? Dividend is a mechanism of returning cash to shareholders. Every fund manager does consider present dividend yield and future growth potential when they undertake the buy decision.
Is there any advantage by participating in the NFO? No. There is no advantage. In fact you will invest in a new fund without knowing how it has performed. You will be investing based on the SID. That is why the NFOs are pushed by distributors rather than being bought by investors. Let us consider the other funds which are available today in this category. The category is called “Equity-Thematic Dividend Yield”. There are a total of 6 funds in this category. The largest fund is UTI Dividend Yield fund with assets of 2,234 crores as of 30th October 2020. There are only 3 funds with assets greater than 500 crores. Let us study their performance. For comparison, UTI Nifty index fund has been added.
Risk Statistics comparison
UTI Dividend Yield fund is clearly the better of the 3 dividend yield funds. It has outperformed the index fund at certain times, while under performing the index at some other times. There is no clear out performance demonstrated by the fund.
There is clearly no consistent out performance by the best performing Dividend yield fund. There is no need to pay a much higher expense ratio for a fund which does not beat the index consistenly. With no track record, HDFC could perform better than UTI or worse than ABSL. No one can tell.