Difference Between Growth and IDCW in Mutual Funds

Mutual funds are a popular investment option to grow your wealth by diversifying your investment. Being a beginner in mutual fund investment, you may have heard about numerous financial and investment terms. Two of them are ‘growth’ and ‘IDCW’. Both can impact your returns, but they work differently.

Read this blog to understand the key differences between growth and IDCW, by defining both of them and highlighting their features.

What is a Growth Option?

Growth Option is a specific investment option within mutual funds, where investors do not receive regular payouts or dividends. With this option, the mutual fund reinvests the profits and dividends back into the scheme to further foster growth. Consequently, the net asset value (NAV) grows continuously and facilitates capital appreciation.

Over time, the growth investments can provide you with notable returns. This investment option is particularly for long-term investors who have the patience to let their money grow in the future, apart from focusing on instant returns.

Essential Features of Growth Option

1. Compounding Effect

   A growth option allows your money to grow over time, thanks to the power of compounding.

2. Higher NAV

   Since the profits are not distributed, the growth option shows a higher NAV.

3. Tax Benefits

   You need to pay taxes on growth only when you redeem funds. Additionally, for long-term capital gains, you can enjoy paying lower tax rates.

4. Long Investment Horizon

   The growth option is suitable for a long investment horizon since the reinvested profits will compound over time.

5. No Regular Payouts

   You cannot get regular payouts, as the mutual fund scheme reinvests the earnings back into the fund.

What is IDCW?

The Income Distribution cum Capital Withdrawal (IDCW) option provides investors the opportunity to earn regular dividends and payouts. It distributes profits to the mutual fund investors as dividends.

Earlier, it was known as dividend plans. Applying it to all previous transactions, the SEBI changed the word ‘dividend plan’ to ‘Income Distribution cum Capital Withdrawal Plan’ in April 2021. After the name change, the payment is divided into capital withdrawal and income distribution.

Essential Features of IDCW

1. Regular Payouts

   One of the key features of IDCW is its regular payouts. Unlike a growth option, IDCW helps you earn a regular income by providing regular payouts and dividends.

2. Capital Withdrawal

   Sometimes the regular payouts might include your investment. This results in a lower NAV.

3. Taxation

   The earning from IDCW is considered income from other sources. As a result, you are liable to pay taxes for the payouts according to your tax slab.

4. Market Dependency

   The dividends you receive from IDCW are not fixed. They may vary depending on the performance of the fund.

Differences Between Growth and IDCW Mutual Fund

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Factors to Consider When Choosing a Growth Option or IDCW

Choosing between a growth option and IDCW might be difficult. Therefore, you need to consider the factors below when choosing between them:

1. Investment Objective

   Before choosing between growth and IDCW, you must consider your investment goals. The growth can be suitable for you only if your investment horizon is long and prioritises capital appreciation. Otherwise, you can choose IDCW for regular payments.

2. Risk Tolerance

   For short-term investment, IDCW is less risky, and the growth option may be prone to market volatility.

3. Income Requirement

   Your requirement for returns is another factor to consider while choosing between IDCW and growth. Growth is appropriate for you if you do not want a regular income. However, if you want a regular income, IDCW is suitable for you.

4. Tax Application

   You have to pay taxes when you redeem the mutual fund units. On the other hand, in the case of IDCW, you have to pay taxes on every payout based on your tax slab.

Final Thought

Since both offer unique benefits, understanding the differences between growth and IDCW is important for you. While IDCW provides you with regular payouts, the growth option can grow your wealth over time by providing compounding returns. IDCW is less risky in the short term, while the growth option is vulnerable to market volatility.

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Frequently Asked Questions

1. How does an NAV distinguish growth and IDCW options in mutual funds?

In growth, a NAV always keeps rising because profits remain invested. Conversely, NAV drops whenever a payout is made in IDCW.

2. Does the growth option provide more returns compared to the IDCW option?

Yes, a growth option allows your money to grow faster, but it does not give payouts. On the other hand, IDCW provides you with regular payouts but can reduce your potential for compounding.

3. Which plan is better between growth and IDCW for long-term investment?

Growth is suitable for long-term investors as they do not need regular income, but let their money grow steadily. This option is particularly ideal for retirement planning.

4. Is it possible to switch between growth and IDCW options in a mutual fund?

Yes, you can switch between growth and IDCW options very easily. You have to initiate a ‘switch’ transaction in a fund. This facilitates the transfer of funds from growth to IDCW or vice versa.