Dividend yield mutual funds, which invest in high dividend paying stocks and companies with better cash flows, have managed to tide over the market volatility and have delivered good returns in the last fiscal.
All dividend yield funds have come out on top and even the worst performer in the category has beaten the average equity mutual fund (MF) by 4% in the past year (till March 31), data showed. In all, five funds from the category have made it to the top-30 list during the period generating 12.1% to 16.8% returns. The sensex and Nifty gained 9.6% and 10% in fiscal 2011.
"Dividend yield funds tend to generally restrict losses in the event of a market downturn or when markets are volatile," said Dhruva Raj Chatterji, senior research analyst, Morningstar India. These funds usually invest in companies and stocks with higher dividend yields or better cash flows making them a defensive bet in volatile markets, he said. For instance, dividend yield MFs declined 49% during the bear market of 2008 while diversified equity funds and sensex fell 56% and 53% respectively. "These funds tackle market volatility well. Their risk adjusted returns are also much superior," said Mahesh Patil of Birla Sun Life MF.
Even in the recent correction (between November 5 and February 10) dividend yield MFs dropped by an average 17.3% while diversified equity funds fell by 19.5%, data compiled by Morningstar showed. Dividend yield funds have higher allocation to energy, banks, especially PSU banks, consumer goods including FMCG and auto, which turned out to be defensive plays, observers said. "Risk-averse investors can consider this option as they act as a cushion when markets fall." owever, these funds would not outperform other equity MF categories in a rapidly rising market, experts said. The average returns from dividend yield MFs just about match sensex and is much lower than mid-cap funds. "They tend to underperform when markets are in a momentum phase. Markets look at only growth stocks as (chances of) capital appreciation is much more," Patil said.
Many dividend yield funds now have higher exposure to mid and small-cap stocks and have also topped the charts within the mid & small cap category in the past year, Chatterji said. But some observers said that this could prove risky at least in the short-term as small and mid-cap funds have been among the worst performers in the past few months.
Officials insisted that mid-cap stocks offer better dividend yielding opportunities. "Larger companies don't give high dividend yields," said an official. Though the assets under management of these funds have risen over the years, they constitute less than 3% of the overall assets managed by equity funds
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