Growth vs IDCW mutual fund plan: Which is a better option? | Value Research Mutual funds give you an option to choose how returns get distributed. Understand which option makes sense.
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Growth vs IDCW mutual fund plan: Which is a better option?

Mutual funds give you an option to choose how returns get distributed. Understand which option makes sense.

In the mutual fund space, there is one key element that an investor must consider before they start investing - the choice of whether they want their returns to be reinvested or if they want periodic distribution of the same.

Thus, most mutual funds give an option to choose between 'growth' or 'IDCW' within both the regular and direct plans of their schemes. Here we explain what they are and which one you should choose.

  • Growth plan: In the 'Growth' plan, the fund house reinvests all the proceeds such as dividends received from stocks and realised gains from the underlying assets back into the fund. Thus, the NAV of growth plans keeps growing with these reinvestments. With such a plan, an investor has to redeem a part of their units to create their own dividends if they are looking for an income from time to time..
  • Income Distribution cum Capital Withdrawal plan (IDCW): In IDCW plan, the fund house pays out some portion of the gains/capital to the unitholders. The quantum of payout and timing is as per the choice of the AMC. After the payout, the fund's NAV drops by the amount distributed. Hence, you should note that these distributions are not over and above the gains made by the fund. In fact, the amount paid out is subject to income tax as financially, it's similar to withdrawing that much money from the fund.

Which plan is better for you?
The biggest drawback of going with the IDCW option is that the investor loses the advantage of compounding. Since your returns are periodically paid out and, on top of that, they are subject to tax as per your slab rate, a portion of your investment value doesn't participate in the future gains made by the fund. This puts a dent on the amount of corpus you can otherwise accumulate by sticking to the growth plan. Further, if you do not wish to consume the distributed income, you will have to figure out where to invest that money.

Even for those investors who wish to receive regular income from their mutual fund investments, the IDCW option is not dependable at all. This is because investors have no control over the timing and amount of distribution. But in the growth option, they can opt for a systematic withdrawal plan (SWP) that gives them total power over the periodic payout.

Therefore, we suggest you to keep it simple and always opt for the Growth option. It is more tax-efficient and gives you more control over when and how much you want to redeem.


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