Growth vs IDCW in Mutual Funds: Which One Should You Choose?
Mutual funds have become a favorite investment choice, particularly among young investors. With higher returns than fixed deposits, they provide an excellent means of increasing your money. Two popular choices under mutual funds are the Growth vs IDCW (Income Distribution Cum Withdrawal) option. In this guide, we will explain the major differences between these two and assist you in determining which is most suitable for your investment purposes.
What Is the Growth Option?
Under the Growth option, the earnings made by the mutual fund are reinvested. This comprises dividends, interest on bonds, or appreciation in the value of securities. The reinvestment of such earnings makes the Net Asset Value (NAV) of the fund increase over a period of time. Investors are not paid anything until they opt to sell their units, and hence this option is best suited for those seeking to create long-term wealth.
What Is the IDCW Option?
IDCW, or Income Distribution Cum Withdrawal Plan, is when the earnings from the mutual fund are distributed among investors on a periodic basis (monthly, quarterly, yearly, etc.). Previously, this option was referred to as the Dividend option but was changed for the sake of clarity. If you opt for IDCW, part of your returns is given out, and this decreases the NAV of the fund.
Primary Difference Between Growth and IDCW:
The primary distinction between Growth and IDCW is the treatment of the profits:
Profit Distribution:
- Growth: All profits get reinvested in the fund.
- IDCW: Profits are paid as periodic payouts to investors.
Growth of Investment:
- Growth: The growth of the fund is more because of the strength of compounding since the profits get regularly reinvested.
- IDCW: The growth is slower since some part of the profits goes to investors and the effect of compounding diminishes.
NAV:
- Growth: NAV goes up as the profits are reinvested.
- IDCW: NAV goes down after every payout.
Taxation:
- Growth: You pay taxes only when you redeem the units, depending on the capital gains.
- IDCW: Taxes have to be paid on the periodic income payouts according to your income tax bracket.
Best for:
- Growth: Most appropriate for long-term wealth building.
- IDCW: Suitable for individuals who require periodic income, e.g., retirees or those with shorter investment time frames.
Risk and Market Volatility:
- Growth: Since profits are reinvested and NAV keeps growing, short-term market fluctuations may cause significant visible changes in the value of your investment. However, this is usually smoothed out over the long term.
- IDCW: Regular payouts might give the illusion of stability, but the NAV drops after each payout. During volatile markets, this could affect both the payout consistency and the underlying capital.
Which One Should You Choose?
Selecting between Growth and IDCW hinges on what you’re saving for:
- In case you’re looking to increase your wealth in the long run but do not require periodic payments, the Growth choice is best. It allows your investment to gain interest over the long run.
- If you desire periodic income from your mutual fund, the IDCW choice might suit you better. However, note that the payments diminish the fund’s appreciation potential.
Tax Implications:
Tax implications are also a consideration in deciding the best option:
- Growth: Capital gains tax is payable on the sale of your units. When held for more than one year (for equity funds), long-term capital gains tax is charged, which is less than short-term capital gains tax.
- IDCW: Payouts that you receive will be taxed as income, potentially leading to a higher tax depending on your income tax slab.
Switching Between Growth and IDCW:
You can switch between the Growth and IDCW options. However, this is treated as a redemption and repurchase, so exit load and capital gains tax may apply. Be sure to evaluate the costs before making the switch. Switching between options without understanding the implications is a common pitfall. If you’re unsure, check out our post on common mutual fund mistakes to avoid errors that could impact your returns.
Conclusion: Growth vs IDCW?
The choice between Growth and IDCW depends on your personal financial needs:
- Growth is better for long-term investors who want to maximize returns through compounding.
- IDCW is perfect for those investors who want the regular payment of income, particularly in retirement.
Whatever you opt for, the most important thing is to align your investments with your objectives and adhere to a long-term plan. Remember that the flexibility in mutual funds is such that you can opt for the option most suitable for your needs.
Disclaimer: This blog is an attempt to make mutual fund investing easy and not financial advice. Always take investment decisions after consulting a financial advisor.
