Dividend Yield Fund

What it actually is

In 2017, SEBI created sharp definitions for every mutual fund category. A dividend yield fund is the one mandated to hold at least 65% of its corpus in equities of companies with a high dividend yield.

Dividend yield is simply the annual dividend divided by the share price. So these funds tilt toward businesses that pay shareholders well from steady cash flows rather than reinvesting everything for growth.

In India this naturally pulls the portfolio toward mature, cash-rich names — PSUs and old-economy leaders. Stocks such as Coal India, Indian Oil, Power Grid, Hindustan Zinc and Vedanta regularly top high-yield screens, where anything above roughly 3-4% is considered generous against the market average.

The funds you'll see

The category is small but established. Schemes like ICICI Prudential Dividend Yield Equity Fund, UTI Dividend Yield Fund, Aditya Birla SL Dividend Yield, Templeton India Equity Income and LIC MF Dividend Yield are the familiar names on the NSE/BSE-listed universe.

They have delivered solid medium-term numbers in recent years — some posting roughly 17-20% annualised over three years — but that owes much to the broad PSU and value rally, so past returns are no promise.

What it answers for an Indian investor

The real question this fund answers: *can I own equities that lean defensive and pay me along the way?*

These funds tend to fall less in sharp corrections because dividend-payers are usually profitable and reasonably valued. The trade-off is they can lag in momentum-driven bull runs led by high-growth, low-payout stocks.

A tax nuance matters. The dividends the underlying companies pay land inside the fund and are reinvested — you, the unitholder, are not taxed on them directly. Instead, because it is an equity fund, your gains follow equity rules: long-term capital gains above ₹1.25 lakh a year are taxed at 12.5%, and short-term gains at 20%.

Think of it as a value-with-income flavour of equity exposure — suited to investors who want steadier participation, not those hunting the fastest compounding.