Should you choose Dividend Yield Funds over Large Cap Funds for your SIP?

Dividend Yield Funds have consistently outperformed the benchmark index across all time frames, without any exceptions.

Comparing Large-Cap funds with dividend yield funds reveals a stark contrast in popularity, with the latter attracting considerably less attention from investors. This trend is evident in the monthly inflow data, which indicates that dividend yield funds receive significantly lower inflows compared to large-cap, Mid-Cap, or Small-Cap funds.

What does the data say?

According to data from AMFI, over the past 12 months, dividend yield funds have seen a monthly average inflow of Rs 286.84 crore. However, in April 2024 and March 2024, there was a notable increase in inflows, surpassing the average with Rs 341 crore and Rs 323 crore respectively.

Meanwhile, there has been a remarkable surge in the AUM of Growth/Equity Oriented Schemes, indicating a strong investor preference for growth-oriented investment vehicles. From April 2023 to April 2024, the AUM in this category witnessed a significant 56 per cent increase, soaring from Rs 15.84 lakh crore to Rs 24.74 lakh crore.

In parallel, Dividend Yield Funds have shown exceptional performance, experiencing an impressive 74 per cent growth trajectory during the same period. This surge has propelled the AUM of Dividend Yield Funds from Rs 14,471.62 crore to Rs 25,216.76 crore, highlighting a growing interest in this investment option. This growth is somewhat concealed as it isn't immediately recognizable in the inflow of these funds.

Dividend Yield Funds Versus Large Cap Funds:

Dividend yield mutual funds focus on equity investments in companies known for their consistent and substantial dividend payouts. These companies typically demonstrate strong profitability and stable cash flows. The fund usually allocates 70 per cent to 80 per cent of its assets to stocks with dividend yields higher than the market average, using benchmarks like the Sensex or Nifty 50 for comparison. The remaining portion of the fund's capital is directed towards stocks with potential for growth, even if they have lower dividend yields or don't pay dividends at all.

On the other hand, Large Cap Mutual Funds allocate a significant portion of their assets to companies with substantial market capitalization. These companies boast strong reputations and a proven history of delivering wealth to investors over extended periods. These funds typically carry lower risk profiles compared to their small-cap or mid-cap counterparts, providing investors with a more stable return on investment.

Return Comparison:

Let's first compare the returns of dividend yield funds with the benchmark index across various time frames. Interestingly, dividend yield funds have consistently outperformed the benchmark index across all time frames, without any exceptions.

Our primary objective here is to determine whether opting for dividend-yield funds over large-cap funds for the long term is a sensible choice. By examining the historical performance data presented in the table below, it becomes evident that dividend yield funds have consistently outperformed large-cap funds across various time frames.

What would have happened if you had started an SIP of Rs 10,000 in growth large-cap funds versus dividend yield funds over the last 5 years?

Let's analyze the returns of dividend yield funds first, then we'll delve into large-cap funds. The investment of Rs 6,00,000 spread over 5 years, with a monthly SIP of Rs 10,000, in dividend yield funds has flourished remarkably to Rs 13,69,728. This translates to a commendable profit of approximately 128.29 per cent, reflecting an impressive, annualized return of 33.74 per cent over the same duration.

Conversely, the Rs 6,00,000 investment over 5 years, with a monthly SIP of Rs 10,000, in large-cap funds has matured to Rs 10,65,950. Although still demonstrating growth, this represents a comparatively lower profit of about 77.66 per cent with an annualized return of 21.18 per cent during the same timeframe.

Conclusion

In conclusion, the historical data clearly demonstrates the outperformance of dividend yield funds over large cap funds across various time frames. Despite being less popular, dividend yield funds have shown exceptional growth and consistently delivered higher returns. For investors seeking diversification potential capital appreciation, dividend yield funds present a compelling investment option, offering impressive, annualized returns and substantial profit potential over the long term.

Disclaimer: The article is for informational purposes only and not investment advice.