Dividend yield funds suit moderate-risk investors seeking lower volatility

These schemes invest in high-dividend stocks to cushion downside volatility, but they can underperform growth-oriented equity funds during strong bull market phases

Dividend yield funds (DYFs) provided a return of 9.1 per cent over the one year ended January 29, 2026, proving to be nearly as resilient as large-cap funds (10 per cent return) during a turbulent period for equity schemes. Should you include these schemes in your portfolio as a safeguard against turbulence?

 

DYFs invest in stocks with attractive dividend yields, calculated as the dividend payout per share divided by the stock’s share price. Thirteen DYFs managed assets worth about ₹32,956 crore as of December 31, 2025.

 

Downside cushion 

High-dividend stocks can help limit downside in volatile markets. “DYFs invest predominantly in dividend-paying companies (≥65 per cent). That tends to bias portfolios towards established, cash-generative businesses, which can cushion drawdowns versus pure growth strategies in certain phases,” says Harish Krishnan, chief investment officer (CIO) – equity, Aditya Birla Sun Life Asset Management Company (AMC). 

DYFs typically hold mature businesses with stable models, strong cash flows and regular dividend payouts. These are often stocks with high earnings visibility — high-quality businesses that enjoy investor patronage. Such stocks tend to be relatively less volatile and reward investors over the long term.

 

“Consistent dividend payouts are often a sign of a company’s financial health and management’s confidence in the future. These companies usually tend to be more resilient during market downturns, offering a cushion when times get volatile, even while participating in the market upside,” says Shibani Kurian, senior fund manager and head – equity research, Kotak Mahindra AMC. 

Scope for steady returns 

A low-interest-rate environment and macro uncertainty can increase investor preference for high-quality dividend-paying stocks. “DYFs are relatively attractive right now because low interest rates make steady dividend income more appealing compared to fixed deposits or bonds. If broader markets rally strongly, dividend-paying companies will also benefit, pushing returns into double digits (10–12 per cent),” says Sailesh Jain, fund manager – equities, Tata Mutual Fund.

 

“DYFs can be relatively attractive in a low-interest-rate environment due to stable cash flows. Over a full market cycle, investors can expect moderate, steady returns that may be lower than aggressive equity funds but better on a risk-adjusted basis,” says Pankaj Mathpal, founder, Optima Money.

 

Risk of lagging in bull markets 

DYFs can disappoint investors in strong bull markets. “In an extreme bull market, they may underperform high growth-oriented funds, due to their inherent characteristic of investing in slightly matured companies,” says Jain.

 

“The dividend basket tends to lean towards financials, energy, utilities, and public sector undertakings (PSUs), exposures that can underperform when markets chase high growth,” says Krishnan.

 

Some dividend-yield portfolios also include mid- and small-cap stocks, which can come under pressure if market volatility persists. “DYFs are not low-risk products as they carry equity market risk, dividend uncertainty, sector concentration risk, and sensitivity to changes in interest-rate cycles,” says Mathpal.

 

Fit for moderate-risk investors 

DYFs can suit investors who have a moderate risk profile and want stability within their equity portfolios. “DYFs are suitable for investors seeking professional help in selecting high-quality companies which regularly pay dividends. It is also ideal for those looking to diversify their equity allocation and mitigate risk. Investments in all equity funds, including DYFs, should be made with a long-term horizon of around five years or more,” says Kurian.

 

“DYFs suit long-term investors with moderate return expectations seeking stability within equities and those who have a minimum investment horizon of five years. These should be avoided by return-chasing investors,” says Mathpal.

 

“One can allocate around 20–30 per cent of the equity portfolio to DYFs,” says Jain.

 

Investors should consider the systematic investment plan (SIP) route for DYFs. These schemes can also support systematic withdrawal plans (SWP). 

 

The writer is a Gurugram-based independent journalist