Principal Dividend Yield Fund is an open ended equity fund with a primary objective to provide long-term capital appreciation and/or dividend distribution by investing in a well diversified portfolio of companies that have a relatively high dividend yield.
Principal Dividend Yield Fund is an open ended equity fund with a primary objective to provide long-term capital appreciation and/or dividend distribution by investing in a well diversified portfolio of companies that have a relatively high dividend yield.
The fund defines dividend yield as “high” if it is in excess of 1.5 times that of the prevailing dividend-yield of the NSE Nifty. So, in the current scenario where the Nifty’s dividend yield is around 1%, any stock with a dividend yield in excess of 1.5% can qualify as a possible investment option for the fund.
This criterion differentiates dividend yield funds from equity diversified funds and is also the reason for the underperformance of the former class. As most companies with higher growth avenues don’t pay huge dividends, the fund’s investment universe gets limited to companies with lesser growth prospects and these normally don’t catch investor’s eye in bull runs.
The asset allocation strategy for the fund is very similar to that of any other theme-based equity fund. The fund manager can invest up to 100% of its corpus in the high dividend yield stocks and around 35% in non theme-based stocks. It doesn’t have any market capitalisation and sectoral bias, which allows it to maintain a diversified portfolio.
The investment strategy is well suited to capture aggregate returns generated by the equity market as a whole. However, the conservative investment theme makes it not very suitable for investors with a higher risk appetite.
The fund’s performance since its inception (in September 2004) has not been satisfactory. It has lagged its compatriots in the dividend yield category in different investment horizons. Its three years compounded annualised return is 26.01%, which is not only significantly less than the benchmark CNX 500 (53.42%) but also other dividend yield funds (28.34% average returns) that have a three year track record .
Throughout the last two years, the fund has maintained a diversified stock portfolio of around 42 stocks. The highest weighted stock has not accounted for more than 7% of the portfolio.
The sectoral allocation for the fund has been offbeat and out of sync with the current market rally, which explains the fund’s dull performance.
The fund has had a constantly higher exposure to five sectors — consumer non durables, fertilizers, pharmaceuticals, petroleum products and public sector banks. These sectors have on an average accounted for around 40-45% of the total corpus and the rest of the corpus is divided among 15-20 sectors. Most stocks in these sectors have underperformed in the last two years.
The fund’s past performance has not been very good and the sector allocation has been offbeat, making it an underperformer in the equity diversified category. However, the fund has been successful in curbing excessive volatility in its portfolio and has carried the lowest risk on portfolio in the last one year. The fund might be suitable for investors with lower risk appetite.
By arrangement with mutualfundsindia.com, a unit of Icra Online
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