Abhishek Sinha
Published on October 3, 2025
For years, PPFAS Mutual Fund stood out for its strong stance against dividends. In fact, during the fund’s first unitholder meet in 2014, late founder Parag Parikh openly stated that dividends create a misleading sense of “extra income,” when in reality they are simply a part of the investor’s own returns being handed back.
So it came as a surprise when PPFAS recently rolled out the Income Distribution cum Capital Withdrawal (IDCW) option—commonly referred to as the dividend option—in its Flexicap Fund.
Why this move?
SEBI’s formal term for dividends—IDCW—doesn’t sound appealing, but it essentially works the same way. Importantly, this change does not impact investors who have chosen the growth option.
The timing of this launch raises questions. The AMC is unlikely to have introduced this without a strategy to expand its Assets Under Management (AUM). For some investors, especially those in lower tax brackets, dividend income may look more tax-efficient compared to long-term capital gains (LTCG). But the risk remains: people in lower tax slabs often have smaller portfolios, making them more vulnerable to market volatility.
A look at the tax angle
Let’s examine some hypothetical cases where income comes entirely from dividends versus LTCG:
- Case 2: ₹12 lakh dividend income attracts zero tax, while ₹12 lakh LTCG results in ~₹87,750 tax.
- Case 3: ₹15 lakh dividends taxed at ~₹1.09 lakh, while ₹15 lakh LTCG taxed at ~₹1.26 lakh.
- Case 6: ₹20 lakh dividends taxed at ~₹2.08 lakh, while ₹20 lakh LTCG taxed at ~₹1.91 lakh.
The comparison shows that at certain levels, dividends may look more attractive tax-wise. However, this is largely theoretical because dividends are neither fixed in amount nor guaranteed in frequency.
Practical scenarios
Consider an investor needing regular cash flow:
- ₹10 lakh annual expenses: If the income comes only from dividends and interest, tax liability is zero. But a mix of LTCG and interest changes the tax picture.
- ₹15 lakh expenses: A carefully balanced mix of interest and LTCG can reduce taxes compared to relying only on dividends.
- ₹20 lakh expenses: Again, combining income sources results in better efficiency than purely depending on dividends.
The key takeaway? While tax comparisons may look favourable in certain cases, they don’t reflect real-world investing, where equity allocation is generally not the main source of retirement income.
Should investors use the dividend option?
Relying on dividends from equity funds for steady income is risky. Payouts are inconsistent, just like capital gains. For most investors, the growth option remains the safer and more efficient choice.
At best, dividends can be treated as bonus income for discretionary spending, not as a reliable stream for essential expenses. If regular income is the goal, short-term debt funds, liquid funds, or money market funds are better suited. High-net-worth investors can explore arbitrage funds or other debt categories.
Bottom line
The launch of a dividend option in PPFAS Flexicap Fund may attract attention, but it does not change the fundamental principle of personal finance: for long-term wealth creation, stick with growth plans.
If you need periodic income, plan withdrawals through debt instruments instead of relying on dividends from equity mutual funds.
Final word: The dividend option may look appealing on paper, but for most investors, it is neither practical nor necessary. Growth remains the wiser choice.
