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When Dividend Yield Matters

Birla Mutual has launched a new equity fund known as Birla Dividend Yield Plus. The scheme is to invest primarily in companies that have a relatively high dividend yield. These are usually sound businesses having strong cash generating ability. As these businesses generally do not have large expansion plans they prefer to reward shareholders with large dividends. Stocks of such companies generally have low betas. This means that these stocks should rise and fall less than the market. This fund should thus be less volatile. This should position the fund as a lower risk proposition as compared to a diversified growth fund.

High dividend paying companies are also considered undervalued and any appreciation in the stock price of these companies will be a bonus for the fund. Birla Dividend Yield Plus will not passively wait for dividends, if the stock appreciates much before a dividend payment the fund may book profits. The fund has defined dividend yield as high if it is in excess of twice the dividend yield of BSE Sensitive Index.

As a risk control measure the fund will not invest more than 30 per cent in one sector and more than 10 per cent in one stock. Investment will also be in low beta stocks to minimise the loss when the index falls. The fund had worked out an indicative sector allocation as follows Auto 10 per cent, Chemical – 12 per cent, Oil – 16 per cent and Banking – 24 per cent. This may vary depending on the circumstances when the fund actually invests. Liquidity will be another important consideration in such a fund. The fund will thus invest a larger proportion in stocks, which are more liquid.

Such a fund is unique in the universe of Indian mutual funds. As such there is no accurate benchmark to track the funds performance. The fund will thus benchmark its performance to the S&P CNX 500.