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Business News/ Money / Calculators/  Product crack: ICICI Prudential Dividend Yield Equity Fund
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Product crack: ICICI Prudential Dividend Yield Equity Fund

The scheme will follow a strategy that will aim to invest in stocks that have a high dividend yield

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What is it?

ICICI Prudential Asset Management Co. Ltd has launched a new scheme called ICICI Prudential Dividend Yield Equity Fund (IPDY). The scheme will follow a strategy that will aim to invest in stocks that have a high dividend yield. As a filter, a significant chunk (80%) of its portfolio will be invested in scrips whose dividend yield is greater than the dividend yield of CNX Nifty index. Dividend yield is defined as the total dividend paid out by the company in the past one year divided by the company’s share price. Although the dividend yield is the primary filter of IPDY for choosing its stocks, the fund manager will also look at other parameters such as a company’s future earning potential, business opportunity, and so on.

What works

Dividend yield strategy is a popular strategy globally as well as in India. At the moment, there are eight such schemes in the Indian mutual fund (MF) industry. The strategy, if managed well, works because typically high dividend yield stocks indicate low or subdued stock prices. Assume that there are two companies, ABC and XYZ, and the fund manager is convinced of their fundamentals. Also assume that both the companies gave 100 as dividend in the past one year. If ABC’s share price is 500, its dividend yield is 20%. And if XYZ’s share price is 700, then its dividend yield is 14%. A high dividend yield strategy would, therefore, pick ABC over XYZ. Further, a low share price can also work in the fund manager’s favour if and when the company grows and its share price rises.

What doesn’t

The biggest drawback of IPDY—like most other new fund offers—is that it lacks history. Also, apart from a flagship value-oriented scheme in its stable, ICICI Prudential AMC launched four value-oriented schemes in the past one year. Only a thin line divides a value fund from a dividend yield fund since it’s possible for value-oriented scrips to have high dividend yields.

However, the fund house has tried to differentiate IPDY from its other value-oriented schemes. For instance, IPDY will invest in scrips across market capitalization and can have more than 30 scrips; both of these are limitations in the value funds launched in the past one year.

Though the fund house has demarcated the way it will manage both these strategies, we’ll have to wait and see how different both these strategies will really be.

What should you do?

At Mint Money, we aren’t convinced by the dividend yield strategy, though the fact is that it does work in many market conditions. But to consciously invest in a scheme because it follows a dividend yield strategy isn’t really, to us, a good reason to have one more scheme in your portfolio when a big challenge for many MF investors has been to limit the number of schemes they have to a more manageable number.

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Published: 01 May 2014, 06:59 PM IST
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