Mutual funds give you an option to choose how returns get distributed. Understand which option makes sense.
17-May-2022 •Ravi Banagere
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.
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.