Growth Stocks vs Value Stocks in India: Tax Drag, Factor Fund Math, and the 2024 Buyback Reset

Growth stocks are companies expected to grow earnings faster than the market average, typically reinvesting profits into expansion rather than paying dividends. They trade at high PE, high PB, and high price-to-sales multiples. Examples in India: Bajaj Finance, Asian Paints, Trent, DMart. Value stocks are companies trading below their estimated intrinsic value, often in mature or cyclical industries, with low PE, low PB, and higher dividend yields. Examples: ONGC, Coal India, NTPC, SBI, ITC. The classification is statistical, not absolute. The same stock can shift category as price and earnings move.

It alternates by regime. From 2014 to 2020, growth and quality dominated, with names like HDFC Bank, Asian Paints, Nestle, and HUL outperforming value. From late 2020 to 2024, value reversed sharply: PSU stocks, capex plays, and commodity cyclicals delivered some of the largest gains in two decades. BHEL rose over 400 percent, REC over 600 percent, Coal India approximately 280 percent, while quality names like Nestle India fell 3 percent. The Nifty 500 Value 50 index outperformed Nifty 50 by approximately 600 basis points annualised over the 2020-2025 window, after underperforming by similar margins during 2014-2020.

Under SEBI's October 2017 categorisation circular, a Value Fund is an equity scheme following a value investment strategy with minimum 65 percent of net assets in equity, but no specific definition of what 'value' means is prescribed. Each AMC defines value internally, typically using PE, PB, dividend yield, or proprietary scoring relative to peers. This creates wide divergence: ICICI Pru Value Discovery Fund holds Infosys (PE 26) and HDFC Bank (PE 19), arguably not pure value. Tata Equity PE Fund follows a stricter PE-based screen. The same category contains funds with very different value definitions.

Not consistently. Over rolling 10-year periods, Indian active 'Value' category funds have shown median alpha of approximately negative 140 basis points versus the Nifty 500 Value 50 TRI, meaning the average active value fund underperforms a passive value index after fees. The 'Focused' and 'Multi-cap' categories with growth tilt have shown similar drag. The structural issue is fees of 1.5 to 2.0 percent on schemes that often hold the same large-cap names as a Nifty 100 fund. A direct plan factor ETF charging 0.30 percent typically outperforms an active fund of either style on a net basis.

Until 1 October 2024, share buybacks in India were taxed at the company level (Section 115QA, 23.296 percent), and proceeds were tax-free for the seller. After 1 October 2024, buyback proceeds are taxed in the hands of the seller at slab rate, treated as dividend income. This flipped the tax efficiency of growth-style large-cap IT and FMCG stocks that historically used buybacks. TCS, Infosys, Wipro, HCL Tech, Bharti Airtel all reduced buyback frequency post-change. For 30 percent slab investors, a Rs 4,150 buyback price now incurs approximately Rs 1,245 tax, versus zero earlier. Value stocks paying regular dividends and growth stocks paying via buyback are now taxed identically.

Statistically (low PE, low PB, high dividend yield, profitable, low debt), the names that consistently filter through are Coal India (PE 7, yield 7.8%), ONGC (PE 6.5, yield 6.2%), Power Grid (PE 18, yield 4.1%), NTPC (PE 16, yield 3.4%), SBI (PE 11, yield 1.6%), Indian Oil Corporation (PE 5.8, yield 4.5%), Bank of Baroda, Hindustan Petroleum, Bharat Petroleum, NMDC. The risk: many are PSU stocks subject to government dividend extraction and political pricing. Low PE alone is a weak filter without checking ROE, ROCE, and earnings sustainability. Coal India and ONGC have traded at sub-10 PE for over 5 years without re-rating.

Names trading at high PE because of structurally strong growth: Bajaj Finance (PE 34), Asian Paints (PE 56), Trent (PE 110), DMart parent Avenue Supermarts (PE 110), Polycab India (PE 50), Pidilite Industries (PE 70), Persistent Systems (PE 60), Affle India (PE 60), Dixon Technologies (PE 90), Astral. The risk: any disappointment in growth rate causes severe re-rating. Asian Paints lost 30 percent over 2024-2025 as gross margins compressed 180 basis points and a new competitor (Birla Opus) entered. Growth stocks demand earnings delivery. Buy at high PE only if you have conviction the growth rate justifies it for at least 5 to 7 years.

Yes, increasingly. Nippon India ETF Nifty 500 Value 50, Motilal Oswal Nifty 200 Momentum 30 ETF, Mirae Asset Nifty 100 Low Volatility 30 ETF, ICICI Prudential Nifty 200 Quality 30 ETF, and Nippon India Nifty 50 Equal Weight ETF cover most factor styles. Expense ratios range from 0.30 to 0.45 percent. AUM is still small versus active funds: Momentum 30 has approximately Rs 3,800 crore AUM, Value 50 approximately Rs 420 crore, Low Vol 30 approximately Rs 1,200 crore. The Indian factor ETF market is roughly where US factor ETFs were in 2010. Costs and tracking quality are still developing.

Coal India has features of both. Value features: PE 7, dividend yield 7.8 percent, dominant market share, government backing, Rs 27,000 crore cash on books. Trap features: structural concerns about coal demand peaking, government using dividends as fiscal tool (creates capex starvation), no independent reinvestment thesis. Coal India returned approximately 280 percent over 2022-2025, defying the stranded-asset narrative. India's thermal coal demand is still growing at 4.8 percent CAGR through 2030 per CEA estimates. Coal India is a value stock that has worked. The long-term thesis depends on whether peak coal demand is 2030 (IEA view) or post-2040 (NITI Aayog view).

Three structural reasons. First, Infosys has historically traded at 22 to 28 PE, which value managers consider attractive relative to its return on equity of 28 to 35 percent. Second, value funds in India typically use relative valuation within sectors, not absolute filters. Infosys looks cheap relative to peer set HCL Tech, Wipro, LTIMindtree. Third, the SEBI value category mandate (65 percent in equity following value strategy) is loose enough to permit large-cap quality names that are not statistically deep value. The result is value funds that look like blue-chip funds with a slight tilt toward lower-PE stocks. Statistically deep value funds in India are rare.

Equity risk premium is the excess return investors expect from stocks over risk-free government bonds. India's 10-year G-Sec yield is approximately 7.05 percent as of May 2026. Sensex earnings yield (inverse of PE) is approximately 4.5 percent. Equity risk premium is therefore negative for the first time since 2008. Growth stocks at 50 to 100 PE require very high earnings growth to justify negative ERP. Value stocks at 6 to 10 PE have inbuilt yield protection. In negative ERP environments, value historically outperforms growth, which is consistent with the 2022-2024 PSU and capex rally. ERP normalisation back to positive typically requires either lower bond yields or higher earnings.

Three principles. First, recognise that pure growth or pure value is rare in Indian markets. Most large-caps blend both. Second, use the equity risk premium as a regime indicator: negative ERP favours adding value tilt; positive ERP favours growth tilt. Third, for SIP investors, a 50-50 split across a Nifty 500 Value 50 and Nifty 200 Momentum 30 ETF provides factor diversification with under 0.50 percent total expense ratio. For lump-sum investors, holding through one full cycle (typically 7 to 10 years) of growth-then-value or value-then-growth dominates timing attempts. A 70 percent core (Nifty 50 index fund) with 15 percent value and 15 percent growth tilt is a reasonable starting allocation.