Growth vs IDCW in Mutual Funds: Which One Should You Choose?
Mutual funds have become a popular investment option, especially among young investors. With better returns compared to fixed deposits, they offer a great way to grow your money. Two common options within mutual funds are the Growth option vs IDCW (Income Distribution Cum Withdrawal) option. In this guide, we’ll break down the key differences between these two and help you decide which is best for your investment needs.
What Is the Growth Option?
In the Growth option, the profits earned by the mutual fund are reinvested. This includes any dividends, interest from bonds, or increases in the value of securities. The reinvestment of these earnings causes the Net Asset Value (NAV) of the fund to grow over time. Investors do not receive any payouts until they choose to sell their units, making this option ideal for those looking to build long-term wealth.
What Is the IDCW Option?
IDCW, or Income Distribution Cum Withdrawal Plan, is where the profits from the mutual fund are distributed to investors at regular intervals (monthly, quarterly, annually, etc.). This used to be called the Dividend option, but it was renamed to avoid confusion. When you choose IDCW, a portion of your earnings is paid out, and this reduces the NAV of the fund.
Key Differences Between Growth and IDCW:
The main difference between Growth and IDCW is how the profits are handled:
Profit Distribution:
- Growth: All profits are reinvested back into the fund.
- IDCW: Profits are distributed as regular payments to investors.
Investment Growth:
- Growth: The fund grows faster due to the power of compounding, as profits are continuously reinvested.
- IDCW: Growth is slower since part of the profits is paid out to investors, reducing the compounding effect.
NAV:
- Growth: NAV increases as profits are reinvested.
- IDCW: NAV drops after each payout.
Taxation:
- Growth: Taxes are paid only when you sell the units, based on capital gains.
- IDCW: Taxes must be paid on the regular income distributions as per your income tax slab.
Ideal for:
- Growth: Best for long-term wealth accumulation.
- IDCW: Suited for those who need regular income, such as retirees or people with shorter investment horizons.
Which One Should You Choose?
Choosing between Growth and IDCW depends on your financial goals:
- If you’re aiming to grow your wealth over time and don’t need regular payouts, the Growth option is ideal. It lets your investment compound over the long term.
- If you want regular income from your mutual fund, the IDCW option may be a better fit. However, keep in mind that the payouts reduce the fund’s growth potential.
Tax Implications:
Tax treatment also plays a role in choosing the right option:
- Growth: Capital gains tax applies when you sell your units. If held for over a year (for equity funds), you’ll pay long-term capital gains tax, which is lower than short-term capital gains tax.
- IDCW: The payouts you receive are taxed as income, which could result in a higher tax rate depending on your tax bracket.
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.
Conclusion: Growth or 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 suitable for investors who prefer regular income payouts, especially during retirement.
Whatever you choose, the key is to align your investments with your financial goals and stick to a long-term plan. Remember, the flexibility of mutual funds allows you to choose the option that best suits your needs.
Disclaimer: This blog aims to simplify mutual fund investing and does not constitute financial advice. Always consult with a financial advisor before making investment decisions.
