IDCW vs Growth option for mutual funds – Which is better?

IDCW-VS-GROWTH

As per the AMFI data, the Assets Under Management (AUM) of India’s Mutual Fund Industry has surged from Rs. 7.61 trillion as of July 31, 2013, to Rs. 46.38 trillion as of July 31, 2023, marking a growth of over six times in a decade. This increase reflects the growth in the number of mutual fund investors over the years and the general increase in awareness related to the mutual fund market. However, when it comes to choosing the type of mutual fund, all an average investor knows is the broad categories which are the equity and debt mutual funds. But did you know that within each category of mutual funds are also options that investors can choose? These are the IDCW and growth options. Read on this blog to know the meaning of these options and how to choose between them.

What are the IDCW option and growth option in mutual funds?

The IDCW (Income Distribution Cum Capital Withdrawal) and Growth option in mutual funds represent distinct ways to manage returns on investments, each offering its own set of advantages and considerations.

The IDCW option, often referred to as the dividend option, is designed for those seeking periodic income from their investments. Under this option, the mutual fund periodically distributes a portion of its earned income and capital gains as dividends to the investors. These dividend payouts can occur quarterly, half-yearly, or annually, providing investors with a reliable source of regular income. One of the main advantages of the IDCW option is the assurance of periodic payouts, which can be particularly appealing to individuals looking for steady income streams.

The Growth option, on the other hand, focuses on capital appreciation and wealth accumulation. Under this option, the mutual fund does not distribute dividends; instead, all income and capital gains are reinvested back into the fund. This results in the gradual growth of the Net Asset Value (NAV) of the fund, reflecting the overall growth of the investment. The Growth option offers the benefit of compounding, where the reinvestment of profits can lead to significant long-term returns. This compounding effect can be particularly advantageous for individuals with a long investment horizon.

What are the differences between IDCW and growth options in mutual funds?

The IDCW option and the growth option cater to a diverse category of investors. The key differences between the IDCW option and the growth option of mutual funds are tabled below.

Category	IDCW option	Growth option
Objective	The IDCW option provides investors with regular income in the form of dividends.	The growth option of mutual funds focuses on capital appreciation and compounding impact for the investors.
Income source	The earned income and the capital gains of the mutual funds are distributed as dividends to the investors.	Under the growth option, all the income and gains are re-invested in the fund.
NAV	The NAV of the fund with the IDCW option is generally lower as compared to a fund with the growth option as the NAV may decrease after dividend payouts.	The NAV of the fund with the growth option typically grows over time as the income and gains are re-invested in the fund.
Taxation	The taxation in the IDCW option is frequent as the dividends declared are taxed in the hands of the investors.	Tax incidence in the growth option is at the time of redemption of units in the form of capital gains.
Target investors	This option of mutual funds is ideal for Investors seeking periodic income from their investments.	The growth option of the mutual funds is ideal for Long-term investors looking for growth.
Risk and Return	This option of mutual funds has generally lower returns and volatility due to regular income distribution.	This option has the potential for higher returns due to the compounding effect.
Compounding impact	Investors in this option have limited compounding impact due to regular dividend payouts.	This option offers the maximum benefit of compounding over time due to reinvestment of funds.
Frequency of income	The IDCW option offers periodic dividend payouts which can be quarterly, half-yearly, or annually	There is no guarantee or pre-determined frequency of regular income in the growth option.

Should I invest in IDCW?

When deciding between the IDCW and Growth options, investors should consider their financial goals, risk tolerance, and preferences. If the investor is seeking a dependable stream of regular income from their investments and focuses on receiving consistent dividend payouts, the IDCW option could be a suitable choice. This option provides the advantage of receiving periodic dividends, which can contribute to meeting ongoing financial needs.

However, the decision to invest in the IDCW option should also consider the investor’s long-term goals. If the investor places a higher priority on achieving long-term wealth growth and capital appreciation, they might find other options, such as the Growth option, to be more aligned with their investment objectives.

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Is it possible to switch from IDCW to a growth option?

You can switch from the IDCW (Income Distribution Cum Capital Withdrawal) option to a Growth option in mutual funds. You would need to redeem the units of the IDCW option and buy units of the growth option which could further involve exit loads/capital gain taxes.

Taxation on IDCW and growth options

The dividends received under the IDCW option are taxed in the hands of the investor. Dividends received in excess of Rs. 5,000 are subject to TDS under Section 194K. The capital gains under the growth option are taxed as short-term gains or long-term gains depending on the type of fund and the applicable tax rate.

Conclusion

IDCW and growth options are both popular mutual fund options catering to investors with different goals. While growth options provide more tax efficiency and capital appreciation, the IDCW option provides a steady flow of income. Therefore, a healthy balance of both these options in the investment portfolio will lead to meeting the financial goals in a timely manner and also a good source of passive income.