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HDFC Mutual Fund has launched HDFC Dividend Yield Fund, an open-ended equity scheme that will predominantly invest in dividend yielding stocks.
Dividend yield is a financial ratio of the dividend paid out in a year to the current market price.
One-off events such as special dividends or a sharp fall in the market price may push up the dividend yield for a stock. Dividend yield funds overcome this hurdle by following a more robust strategy.
Dividend yield funds tend to contain losses in falling or volatile market conditions. This is because companies that pay good dividends usually are mature businesses with sustainable growth and good cash flows and these companies may be the go-to options when the market situation is unfavourable.
For example, during the market crash witnessed between February and March this year, dividend yield funds contained losses better than the Nifty 50 TRI as well as the broader Nifty 500 TRI. In the past, too, these funds have done well to contain losses — for instance, in the 2011 fall as well as during the bearish phases in 2018.
Therefore, this category suits those investors who prefer lower volatility.
High dividend yield companies also make for good bets in an environment in which interest rates on fixed- income instruments are low, as is the case today.
Investment strategy
HDFC Dividend Yield Fund will invest minimum 65 per cent of its assets in dividend-yielding companies or those that choose to do a buyback in addition or in lieu of payment of dividend.
The scheme defines dividend- yielding stocks as those which have paid dividend (or have done a buyback) in at least one of the three preceding financial years. Preference will be given to those stocks that have a higher dividend yield than the Nifty 50 index. The current dividend yield of the Nifty 50 stands at 1.22 per cent.
The fund considers stocks with buyback opportunities as well.
The scheme will be sector- as well as market-cap-agnostic and pick stocks of companies with stable businesses (in terms of cash flow, share price and market-cap movement), growing dividend prospects, buyback opportunities and attractive dividend yields.
The asset management company currently sees opportunities in utilities, mining and financial sectors in the public sector entities (PSE) space.
The fund will be benchmarked against the Nifty Dividend Opportunities 50 TRI (Total Returns Index).
Timing is key
UTI, Aditya Birla Sun Life, Principal, ICICI Prudential and IDBI are among the fund houses that currently offer a dividend yield scheme.
On an average, these funds have outperformed the Nifty Dividend Opportunities 50 TRI in the last year.
The sharp fall and the quick rally in the market this year have been a contributing factor for the one-year performance, as the dividend yield theme has have been favoured due to the uncertain market conditions.
But over longer periods of three and five years, average returns lag the benchmark. Considering that this is a thematic fund which performs well only in certain market conditions, investors may need to time their entry and exit to reap the maximum benefit.
The NFO closes on December 11. The fund will reopen for ongoing purchase shortly after the closure.
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