Widely read:
Let's quickly understand what growth and dividend plans are before we look at their long-term performance.
Growth plans reinvest the profits generated for faster wealth creation, while dividend plans distribute a portion of the profits generated by their investments as and when they like. However, unlike a bonus, this is not an additional gain—it comes out of the fund's net asset value (NAV). For instance, if a dividend plan with a NAV (read: price) of Rs 20 declares a Rs 1 dividend per unit, the fund's NAV will drop to Rs 19 after the payout.
Performance of growth and dividend funds
Now, let's look at the actual performance of the HDFC Flexi Cap Fund over the last 10 years. Let's assume Rs 10 lakh was invested in both the growth and dividend plans of the fund a decade ago. Here's how they fared:
Growth vs dividend plans: Performance over 10 years
Rs 10 lakh invested in HDFC Flexi Cap Fund
| Plan type | Investment value after 10 years (remaining corpus) | Total dividends paid over 10 years | Taxes paid (on dividends or LTCG) | Total post-tax payout (dividends + remaining corpus) |
|---|---|---|---|---|
| Growth plan | Rs 41.8 lakh | Rs 0 | Rs 4.0 lakh | Rs 37.9 lakh |
| Dividend plan (IDCW) | Rs 15.7 lakh | Rs 8.7 lakh | Rs 3.3 lakh | Rs 21.1 lakh |
| Note: Data as of November 30, 2024. LTCG tax is applied at 12.5 per cent, excluding the grandfathering clause and Rs 1.25 lakh exemption. Dividends are taxed at 30 per cent, and the total post-tax payout includes the remaining corpus and post-tax dividends. | ||||
Key takeaways
-
The growth variant of the fund is a clear winner. It
generates nearly 80 per cent more post-tax wealth
than the dividend plan, making it a far better option for long-term wealth creation.
-
That's primarily because the growth
plan uses compounding
to grow the corpus uninterrupted, whereas the
dividend plan sacrifices growth
due to regular payouts.
- Taxes also take a toll on dividend plans. While, on the surface, you pay less tax on the dividend plan (Rs 3.3 lakh), the growth plan, despite building a considerably larger corpus, incurs just Rs 4 lakh long-term capital gains (LTCG) tax at the time of withdrawal.
In case you didn't know, dividends are now taxed as per the investor's slab rate, and if your total dividend income exceeds Rs 5,000 in a financial year, a 10 per cent TDS is deducted at source.
Here is an example:
-
Suppose you receive a Rs 10,000 dividend and fall under the 30 per cent tax slab.
-
Rs 1,000 (10 per cent TDS) will be deducted before you receive the money.
- You will then pay an additional Rs 2,000 in taxes when filing returns, making your effective post-tax dividend Rs 7,000—a significant reduction.
This is particularly impactful for investors in higher tax brackets, reducing the attractiveness of dividend plans compared to other investment options.
Why do growth plans make more sense?
The HDFC fund example clearly demonstrates that growth plans outperform dividend plans over the long term, thanks to:
1. Uninterrupted compounding of the investment.
2. Lower tax liability due to deferred taxation on long-term capital gains.
3. Higher total wealth creation , even when taxes are considered.
What if you need regular income?
Opt for a systematic withdrawal plan (SWP) from a growth plan.
It is a more tax-efficient and predictable alternative.
Dividend plans lose out due to reduced compounding, higher tax inefficiencies and erratic payouts. For most investors, growth plans remain the superior choice.
Make informed investment decisions with Value Research Fund Advisor —your trusted guide to personalised fund recommendations and insights tailored to your financial goals. Start your journey to smarter investing today.
Also read: Should I go with the growth or dividend option of an ELSS?
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