Growth Vs IDCW Fund: Which Is A Better Option?

Growth Vs IDCW Fund: An Overview

Mutual fund investment is the most preferred investment option among young investors. More people are turning towards the stock market to grow their money because it offers far better returns than fixed deposits or regular deposits.

There are different types of mutual funds that meet the requirements of different investors. Income Distribution Cum Withdrawal Plans (IDCW) and growth mutual funds are the most popular types of mutual funds. If you choose an IDCW mutual fund, you will receive profits at regular intervals because the profits made by the companies are paid out to the investors. On the other hand, if you choose a growth mutual fund, the profits made are invested back into the fund. In this article, we are going to learn about the difference between growth & dividend reinvest mutual funds, and growth vs IDCW mutual funds. 

What is an IDCW Mutual Fund?

IDCW was previously known as a dividend plan mutual fund.  It invests in companies that have the potential to pay dividends periodically such as quarterly or annually to their shareholders. The fund managers of the IDCW (Income Distribution Cum Capital Withdrawal) fund aim to invest in dividend-yield stocks and have good track records in paying dividends. However, companies pay dividends to their investors when they make a profit and these companies are mostly large cap/blue chip and well-established in the market.

Let's understand with an example, let's say you bought 100 units of an IDCW mutual fund scheme and the dividend declared is Rs. 1 per unit. You will receive Rs. 100 as dividend income. This dividend income is credited to the investor’s account. The dividend income comes under ‘Income from other sources”’ while filing for income tax returns. 

Key Takeaways

• The two most popular mutual fund schemes are growth funds and dividend funds. 
• IDCW plan is suitable for those who want to earn passive income as they offer dividend payout at regular intervals. 
• Growth mutual funds help you to grow your wealth in the long term. 

What is a Growth Mutual Fund?

Growth mutual funds invest in companies that have the potential to grow and generate high returns. The main objective of the fund is to grow investors’ investments. However, investing in growth funds can be risky as these companies are susceptible to volatility in the market. Growth companies reinvest their profits back into the company instead of distributing them as dividends. Hence, you receive profits on profits which helps you to receive the benefits of compounding. It is advised to stay invested in a growth mutual fund for 3 to 7 years to reap the maximum benefits. Growth mutual funds are the best option unless you need regular cash flow. 

The NAV (Net asset value) of the fund increases when the fund value appreciates which leads to overall growth in the portfolio valuation of the fund. The capital gains earned on mutual funds are taxable at specific rates. The investors will pay this tax while redeeming the units of the fund. However, the investors are liable to pay tax only on the profits. 

Growth Vs IDCW Mutual Funds: Which is Better?

1. The profits earned in the IDCW plan are distributed to investors. On the other hand, the profits earned by the fund are reinvested back into the scheme. 
2. Dividends are paid to the investors from the fund NAV. Hence, the NAV gets reduced after paying dividends. In the case of a growth plan, the NAV value increases because the profits are reinvested. 
3. The total returns earned in the IDCW plan are lower than the growth plan because of the dividend payout on a periodic basis. 
4. Investors have to pay tax in the IDCW plan if they come in the tax slab bracket. On the other hand, investors of growth plans are liable to pay a 10% tax for short-term capital gain if the investment is sold within one year and a 15% tax on long-term capital gain is paid when the investment is sold after one year. 
5. Investors looking for regular income or stable income prefer to invest in the IDCW plan and investors looking to grow their wealth can opt for a growth plan. 

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Conclusion

Both IDCW and growth plans are great investment options. If you are looking for wealth appreciation in the long term, then investing in a growth plan will do the work. And if you are looking to receive regular income or passive income, then investing in an IDCW plan will be ideal for you. Moreover, you should choose a mutual fund scheme based on your requirements, risk appetite, and financial goals. Also, before choosing between IDCW and growth mutual funds, you should understand the basics of the stock market, types of mutual fund schemes, IDCW, and growth differences to make informed decisions. 

This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.