Contents
Definition
A Dividend Yield Fund is a SEBI-defined equity mutual fund category under the Categorisation and Rationalisation Circular (October 2017). The category mandates that at least 65% of total assets be invested in stocks whose dividend yield is higher than the dividend yield of the scheme's benchmark index (typically Nifty 500 or Nifty 50). The remaining up to 35% may be invested in other equity or debt instruments as per the SID. "Dividend yield" in this context refers to the stock-level trailing twelve-month dividend per share divided by current market price — not the IDCW payout of the mutual fund scheme itself. Each AMC may operate only one Dividend Yield Fund scheme.
How the category is defined
SEBI's Categorisation Circular specifies:
- Minimum 65% of total assets in dividend-yielding stocks (each stock's dividend yield > benchmark index dividend yield)
- Remaining allocation at fund manager discretion per SID
- Benchmark yield threshold: Nifty 500 or Sensex trailing dividend yield, published by NSE/BSE
The yield filter creates a valuation-aware selection universe — stocks paying high dividends relative to price are often in mature sectors: PSU banks, FMCG, utilities, and manufacturing. This category typically excludes high-growth, low-dividend technology stocks that dominate market-cap-weighted benchmarks. AMFI's bi-annual list confirms schemes classified in this category. Sector composition shifts materially depending on prevailing market valuations, since a stock's yield changes as its price moves.
Tax treatment
Dividend Yield Funds maintain ≥65% in equity and are classified as equity-oriented funds for income tax purposes. Tax rules as of FY2024–25:
- Short-term capital gains (held <12 months): 20%
- Long-term capital gains (held ≥12 months): 12.5% on aggregate gains exceeding ₹1.25 lakh per year
- IDCW payouts from the fund: Taxable at the investor's slab rate (note: stock dividends are received by the fund, not passed through to unit-holders unless the fund opts for IDCW plan)
The fund-level equity tax treatment applies regardless of the high-dividend nature of the underlying portfolio — unit-holders are taxed on capital gains from unit redemption, not on underlying stock dividends received by the scheme.
What investors should look at
Relevant factual parameters:
- Portfolio dividend yield vs index yield: The scheme's portfolio yield should consistently exceed the benchmark yield for the mandate to be honoured. Fund factsheets typically disclose weighted average portfolio dividend yield.
- Sector concentration: High-yield stocks cluster in PSU banks, utilities, FMCG, and energy. Assess concentration risk against these sectors' regulatory and business environments.
- Rolling return vs Nifty 500: Dividend Yield Funds can structurally underperform in high-growth-stock bull markets but may outperform in range-bound or value-rotation markets.
- Turnover ratio: As market prices shift, stocks may exit or enter the dividend-yield universe — track turnover as a proxy for portfolio stability.
- Expense ratio: Compare against large-cap and value fund alternatives which often share similar portfolio characteristics.
Worked example
A fund with ₹4,000 Cr AUM: 70% (₹2,800 Cr) in stocks with dividend yield ≥1.5% (benchmark Nifty 500 yield = 1.4%). Holdings include Coal India (yield ~5%), ITC (~3.5%), NTPC (~2.5%), and Power Grid (~2.2%). The remaining 30% is in other equity or debt at manager discretion. When Coal India's stock price rises sharply, its yield may fall below the threshold, triggering a replacement from the eligible universe. In FY2023–24 when value stocks outperformed growth stocks in India, Dividend Yield Funds as a category delivered returns comparable to large-cap funds, per AMFI category data.
See also
Primary source
SEBI Categorisation Circular, October 2017
MintByte (ARN-314872 / APMI APRN-01658) is a SEBI-registered investment adviser. This glossary entry is for educational purposes only and does not constitute investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.