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.
- SEBI mandates that dividends can be paid out only from profits earned by the respective mutual fund.
- Dividend payout rates may vary with each payout cycle.
- Dividends paid on both equity and debt mutual funds are taxed as per the investor's income tax slab. In case the investor doesn't have any source of income other than mutual funds, a mandatory TDS is deducted at 10% from the total dividend income. However, no deduction takes place if the dividend distributed is Rs. 5000 or lower.
TDS is deducted at 10% from the total dividend income. However, no deduction takes place if the dividend distributed is Rs. 5000 or lower.
Here are some important features of the IDCW option:
1. Regular Payouts: This option may be suitable if you want periodic income from your investment.
2. Lower NAV: The Net Asset Value (NAV) of IDCW is usually lower than the growth option, as frequent payouts reduce the investment value.
3. No Fixed Payouts: The amount and frequency of payouts depend on the fund’s performance and are not guaranteed.
4. Taxation: The dividend received is taxable. It is added to your total income and taxed as per your applicable tax slab.
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:
- Typically, the Net Asset Value or NAV of growth mutual funds is always higher than the IDCW option. Simply because of profits being reinvested into the scheme to earn compounded returns.
- You pay tax on growth mutual funds only at the time of redemption. If you’ve invested in growth type equity mutual funds, short term capital gains (less than 12 months) are taxed at 15%. As for long term capital gains (more than 12 months) are taxed at 10%. However, any capital gains up to Rs. 1 lakh is tax-exempt.
- As for growth type debt mutual funds, short term capital gains (less than 36 months) are taxed according to your income tax slab. At the same time, long term capital gains are taxed at 20%.
Here are some key features of the Growth option.
1. Power of Compounding - Since the returns are reinvested, the investment can grow over time, helping you build wealth.
2. Higher NAV - The Net Asset Value (NAV) in this option is generally higher than the IDCW option as earnings remain invested.
3. No Regular Payouts - This option does not provide periodic income, making it ideal for those focused on long-term wealth creation rather than regular cash flow.
4. Ideal for Long-Term Growth - If your goal is to maximise returns and grow your capital over time, the growth option can be a better choice.
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.
Additional Read: Know all about MF Central – Newly Launched Service from CAMS and Kfintech
Growth mutual funds are taxed only when you sell your investment. As long as your money stays in the fund, no tax is applied.
For most equity mutual funds, if you hold your investment for over a year before selling, you don’t have to pay tax. For most debt funds, if you redeem after three years, there is no tax liability. This makes long-term investments in these funds more tax-friendly.
Dividend mutual funds work differently. You don’t have to pay tax when you receive a dividend. However, the mutual fund house deducts tax before distributing dividends. This means the amount you receive is already taxed, making dividend funds seem more tax-efficient in certain cases.
If you need a regular income and have a large investment, a Systematic Withdrawal Plan (SWP) can be a good alternative. Instead of relying on dividends, SWP lets you withdraw a fixed amount at regular intervals while keeping the rest of your investment growing. This approach offers better control over withdrawals and potential tax benefits, depending on the duration of your investment.
Before choosing between growth and dividend mutual funds, consider your financial goals, investment horizon, and tax implications.
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In a Systematic Investment Plan (SIP), the growth option reinvests all profits, increasing long-term returns. The IDCW option pays earnings as periodic payouts, offering regular income but lower compounding benefits.
IDCW provides periodic payouts, making it suitable for those seeking regular income. It helps investors manage cash flow while staying invested. However, returns may be lower as profits are not reinvested for long-term growth.
You can switch from IDCW to growth by submitting a request to your mutual fund provider. However, this may involve exit loads or tax implications, depending on the investment duration.
The growth option is better for long-term wealth creation as returns are reinvested. Dividend reinvestment helps generate returns but may not match the compounding benefits of the growth option over time.
Investors can switch from IDCW to the growth option. This is treated as a redemption and reinvestment, which may have tax and exit load implications based on the holding period.
The growth option is better if you want long-term wealth accumulation, as returns are reinvested. The dividend option suits those who prefer periodic payouts. Your choice depends on your financial goals and need for regular income.
It depends on your needs. Growth funds are suitable for long-term investors looking to build wealth. IDCW funds offer payouts at intervals, making them better for those who need regular income.
Growth funds are ideal for long-term investors seeking compounding benefits, while IDCW (dividends) offer periodic income. IDCW payouts reduce fund value, whereas growth funds let investments grow uninterrupted.
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20 March 2025
8 mins read
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