Conservative mandate, moderate pay-off

With an average return of 41 per cent over the past year, the seven funds in the dividend yield category have delivered fairly well in the ongoing bull run.

Their performance is better than that of the equity large-cap category (33 per cent average return) and benchmarks such as CNX Dividends Opportunities Index (27 per cent) and CNX 500 (35 per cent).

But they lagged the mid-cap and small-cap category, which clocked average returns in excess of 60 per cent last year.

Dividend yield funds cater to equity investors who want to play it relatively safe — by buying stable stocks that pay regular dividends.

Dividend yield funds invest a good chunk of their portfolio in stocks whose dividend yield (the ratio of a share’s dividend to its market price) is higher than the Nifty or its benchmark.

By limiting downsides and giving regular payouts, dividend yield funds are expected to do better than the normal diversified pack in times of volatile or bear markets.

Regular dividend paying companies generally have a sound financial position and provide stability to the portfolio.

The corollary is that these funds, while they do fairly well in bull markets, don’t quite measure up to riskier funds that roar along. Over the last year, UTI Dividend Yield (the largest fund in the category with a corpus of ₹3,202 crore) ranked the lowest among peers with 34 per cent return. Among the larger funds, Birla Sun Life Dividend Yield Plus was the best performer (45 per cent return) followed by BNP Paribas Dividend Yield.

The latter also delivered the best annualised returns over three- and five-year time periods.

Dividend yield funds have the leeway to invest in stocks across market capitalisations.

That said, large-cap stocks which usually pay good dividends, form a chunk of their portfolios. This is borne out by the average market capitalisation of these funds being about ₹47,000 crore.

UTI Dividend Yield has delivered lower returns as 4-7 per cent of its corpus is deployed in debt and cash. A preponderance of large-cap stocks in its portfolio (the average market cap of the fund at about ₹65,000 crore is the highest among peers) also held it back in a rally led by small- and mid-caps over the past few months.

Birla Sunlife Dividend Yield has benefited by being almost fully invested in equities over the last year and picking stakes in small- and mid-cap stocks such as Apar Industries and KEC International which have doubled or tripled.

Similarly, picks outside the large-cap space such as Texmaco Rail & Engineering and VA Tech Wabag have helped the BNP Paribas Dividend Yield fund do better than most peers.

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