If you've ever invested in mutual funds, you know that both debt and equity mutual funds come divided into Income Distribution cum Capital Withdrawal (IDCW), previously known as dividend, and growth options. Often investors end up confused as to which is better. However, the idea that any one option is better than the other is a fallacy.
Your choice will entirely depend on your financial goals, investment horizon, and tax situation. You may also opt for a combined investment, wherein you fill your kitty with both IDCW and growth funds.
Here, the profits earned by a mutual fund are paid out to investors, as dividends, at pre-decided intervals. For most IDCW (previously called dividend mutual funds), an annual payout is the most common interval. Other schemes may offer daily, monthly and quarterly payouts as well.
Noteworthy points for IDCW funds:
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In growth funds, profits earned are reinvested in the scheme, and no interim payout takes place. Here, you stand a chance to earn profits on profits.
Noteworthy points for growth mutual funds:
The primary difference between the IDCW and growth option boils down to the returns you will earn from compounding. While IDCW option makes more sense if you want to earn a regular stream of income through mutual funds, growth option is ideal if you have a long investment horizon as you get the benefit of compounding.
Points of Difference | Growth Option | Dividend Option |
NAV | Has a higher NAV since the re-invested profit can increase in value over time. | Has a comparatively lower NAV since dividend payouts are deducted from the NAV. |
Profits | Re-invested into the scheme | Distributed to investors |
Total Returns | Since the growth option focuses on long-term wealth creation, total returns are more than the dividend option. | Since dividend option provides periodic payouts to the investors, the final corpus will be less than the growth option. |
Tax impact | Tax applicable on long-term and short-term gains when redeemed. | Dividend income taxed as per the investor's slab rate. |
Besides, experts recommend the IDCW option when the market trajectory is moving upwards. During this time, the NAVs of funds rise consistently, and there is a higher likelihood of a fund declaring significant dividends.
In contrast, wealth accumulation may be slower and more spread out for the growth option, but the end return will be higher when compared to the IDCW option.
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