It’s raining NFOs. Fund Houses want to cash on strong market sentiments. I am little late on reviews as there are just too many NFOs going on currently. Anyways, let us do a quick review of new fund launched yesterday 27 Nov 2020 – HDFC Dividend Yield Fund NFO. We will see if you or who should invest in this fund at this time.
Disclaimer : Needless to state that this review is my personal opinion and you should either consult your Investment Advisor or do your own research before taking any decision.
First thing First.
What is Dividend Yield?
Dividend yield is basically dividend received divided by its share price. Let us understand with simple example.
Say you buy Coal India Ltd stock at Rs. 120. Some where down the line company declares dividend of day Rs 12 per share. So you get Rs 12 per Rs 120 invested. That is 120/12 = 10%. This is called as dividend yield of that particular stock.
So Coal India Ltd has dividend yield of 10%. This will change as per stock price as well as dividend declared in that year. This way each company that gives dividend will have different dividend yield.
What is so great about dividend yield?
Few years back dividend declared by companies were totally tax free. So many people used to treat investing in stocks of dividend paying companies similar to getting interest from say fixed deposit.
This was popular concept especially in older people. Some people used to buy such stocks for retirement income. Companies that pay high dividend are generally large and stable companies.
So rather than investing say Rs 1 Lac in a FD, there was a section which would invest in stocks of say Coal India Ltd and get dividend from company instead of interest from fixed deposit. Post tax returns were better. Plus if you hold such companies for long period, generally they used to appreciate slowly but surely.
Since these companies pay dividends, it means they are making consistent profits, do not have large debt, management is more content with the current business and not eager to do large investments and grow further. So less risly.
These are companies that have reached certain level of maturity and want to remain stable than take additional risk trying new investments. This defensive approach suited people who are little risk averse and at the same time it provided better returns than FDs or debt funds.
Is that relevant even today? Let’s see ahead.
What is a dividend yield fund?
Dividend yield mutual fund is a mutual fund which will invest in stocks that are providing high dividend yields. So it is an equity mutual fund with theme to invest only in companies that have high rate of dividend yield.
For understanding expected risk and returns for any mutual fund, we need to know what is the benchmark for the fund. Here it is “NIFTY Dividend Opportunities 50 TRI”. So basically fund will aim to perform better than this benchmark.
Let us see rolling returns of last ten years for few benchmarks.
Overall, NIFTY Dividend yield benchmark has performed better than Nifty as well as Nifty 200 indices over long period. May be a clue that our ancestors were right in their approach of selecting stocks.
Do note however, funds do not payout dividends received from stocks they invest in. They get added to fund NAV.
If you need regular income from Mutual Fund, you would need to do a SWP (Systematic Withdrawal Plan) or dividend option as any other mutual fund.
Don’t have expectation that you will get regular dividends from a Mutual Fund because of its theme.
What returns can we expect from HDFC Dividend Yield Fund?
It is very difficult to predict future returns of a any fund. Even more difficult for a New Fund Offer as there is no history to provide indication. So let us look at some of the existing peers of this new fund.
Below are 10 year rolling returns of the funds in Dividend Yield Category.
Overall I see good performers got returns in range of 11% or more in long term (10 year period). Of course they are under performers which dragged category average to around 7%.
Risks for HDFC Dividend Yield Fund
Ultimately this is a Equity fund. So most of risks in investing in stock market apply to this fund as well.
However due to Dividend Yield theme of investing in stock, it takes little conservative approach to investing.
So personally I feel, it is less risky than may be a pure large cap fund. Typical asset allocation of equity in this fund will be from 65 to 100 % compared to pure equity funds having little higher equity allocation. (Fund presentation video at bottom however rates it between Large and Large-Mid Cap funds)
Mr. Gopal Agarwal & Mr. Anand Laddha are very experienced people in this field. However Mr. Gopal is little new to HDFC AMC – he joined around July 2020.
I am not great fan of Fund Manager changes. Fund Manager is the one who is finally taking decision on stock selection, allocation etc. So Fund Manager change to a scheme in general are to be avoided.
Since 2017, Mr Gopal has switched from Tata AMC -> DSP Fund -> HDFC MF. Two changes in last three years (2017 to 2020). Hope he stays with this AMC and this fund for long time.
Conclusion – Should you invest in HDFC Dividend Yield Fund NFO?
I know many of you came to just read conclusion of HDFC Dividend Yield Fund review. So here it is.
My personal opinion is you can invest in HDFC Dividend Yield Fund but…
Let me explain.
I think Dividend Yield theme is a good equity theme to invest. It has a conservative approach to equity investing and may suit some section of investors.
It may not give runaway returns but at the same time stocks that fund invests in are relatively strong companies. Looking at current economic condition, this theme could deliver descent returns (of course over long time).
Who should invest ? People matching risk profile and see value in dividend paying stocks with investment horizon of around 5 – 7 years or more.
Why “but…” then?
I feel there are few mutual funds in this theme already. Some of them are here for more than a decade now. It makes more sense to invest in one of them as we have their track records to validate.
UTI Dividend Yield fund could be my pick as alternative to HDFC Dividend Yield Fund. Both have similar approach and asset allocation. Plus UTI fund has a long term Fund Manager so we can expect consistency.
Investment Details of HDFC Dividend Yield Fund
Investment Details about HDFC Dividend Yield Fund NFO as below.
Other references about HDFC Dividend Yield Fund
Link to HDFC Dividend Yield Fund Scheme Information Document or SID for your own research and comments.
Do see HDFC’s own presentation video directly from Fund Manager Elect (I took that word Elect from US President Elect :)).
That’s all with HDFC Dividend Yield Fund Review. Happy reading & happy investing.