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Dividend Yield Funds: Risk And Return
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Are Dividend Yield funds less risky compared to other Equity Diversified funds?
As we have stated dividend yield mutual fund schemes are ideal when the market is in a volatile state because such schemes even out steep rises and falls in stock prices. The basic characteristic of such schemes are that they deliver consistent returns and over a long period of time, they outperform most other equity-diversified schemes.
One of the main reasons why dividend yield funds are less risky is because they follow the value style of investing. Companies, which have a high dividend yield, are those that have been in existence for a long period of time. They are large and mature companies and have a consistent record of profitability and since they have consolidated their business, they are in a position to pay out high dividends to their shareholders. The prices of such stocks are attractively valued due to these factors.
Their prices do not correct as much during market downturn like other stocks not do they appreciate as much when the market is rallying. This means that these stocks are subject to lower volatilities and do not fall as much as the broader market in a bear phase or stay down as long.
When identifying high dividend yield stocks for investments, the fund managers of such schemes pick stocks that have already been beaten down and underperformed the market for some time. Since the stock’s share price has already seen a significant drop, there is less scope for further depreciation.
Dividend Yield schemes deliver comparatively moderate returns compared to other Equity Diversified categories
Consistent, moderate regular returns – these are the key attributes of Dividend Yield schemes. The main objective of the scheme is to invest in good underlying businesses, which pay regular dividends at attractive valuations. Unlike growth-oriented companies, which are very sensitive to news and economic events and are likely to be volatile, high dividend paying companies remain calm in most situations and are less likely to react sharply to events.
Due to their defensive nature, high dividend yield stocks do not participate in momentum rallies or in the initial leg of a market rally. The outcome of this is that these stocks then miss out on the opportunities, which are present in such a rally. Therefore, it may look as if dividend yield funds are underperforming the market in the short-term compared to other equity oriented schemes.
Over the long term, however, these schemes deliver balanced risk-adjusted returns, with most of the ups and downs evened out. Some Dividend Yield schemes are exposed to higher risk and may post below-average returns and this can be attributed to their investment strategy. Some schemes may also prefer to invest in value stocks belonging to large cap or midcap companies. Still others follow a multi-cap strategy, which leads to differences in returns. You must realise that on an average dividend yield schemes have the mandate to invest only 65 percent or more of the total assets in dividend yields stocks.
At the end of the day, the fund manager’s efficiency in taking a call plays a very important role in generating returns.
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