MUMBAI: Investors looking for equity schemes with lower volatility and a more tax-efficient way to receive payouts by companies could consider dividend yield schemes. This category of funds invests in companies which pay higher dividends that have been in demand among investors of late with interest rates near record lows. Dividend yield schemes must not be confused with the dividend option available for fund categories.
Aditya Birla Sun Life, UTI and ICICI Prudential and HDFC are among the asset managers that offer dividend yield funds. The new fund offer of Tata Mutual Dividend Yield is currently open for subscription.
With the market recovery expected to be broad-based, fund managers believe dividend yield companies trading at attractive valuations could run up faster.
“Dividend yield fund will be a blend of value and stable growth companies. With value coming back in the reckoning globally, we believe the dividend yield strategy will capitalise on the investment opportunities in that segment,” says Rahul Singh, chief investment officer, Tata Mutual Fund. He said dividend yield schemes provide downside protection in uncertain times such as these.
The Nifty Dividend Opportunities 50 Total Returns Index (TRI) has outperformed the Nifty 50 TRI by an annualised 1.98 per cent over a period of 14 years. While Nifty 50 TRI has returned an annualised 9.47 per cent from October, 2007—just before the global financial crisis in 2008-09 — to March 31, 2021, the Nifty Dividend Opportunities 50 TRI has delivered 11.45 per cent. Over the past 10 years, the Nifty Dividend Opportunities 50 Price Return Index (PRI) has returned 106.93 per cent, while the Nifty Dividend Opportunities 50 TRI, which also takes dividend into account, has returned 170.33 per cent.
Financial planners recommend this category to conservative investors with low-risk appetite.
“Conservative investors who need low volatility and a regular income should opt for a systematic withdrawal plan which would lower their tax liability,” says Rupesh Bhansali, head (distribution), GEPL Capital.
Bhansali said that an investor can buy the growth option of such an equity mutual fund scheme.
After dividend income from stocks became taxable in the hands of investors, those in the high tax bracket would pay 30 per cent income tax on dividends received. On the other hand, if they invest in an equity mutual fund like a dividend yield scheme and withdraw after one year, they would pay only 10 per cent capital gains tax.