Should I avoid a growth plan and opt for a dividend plan?

If I take IDCW (monthly) re-investment option in place of growth option in a particular scheme, what are the differences and facts which I should know? What are the tax implications in this case? - Abhinav Sri

You should avoid dividend (IDCW) plans of mutual funds, and we will tell you why.

As the name suggests, these dividend plans give you dividends from time to time. But you should avoid them still. Because though IDCW plans (popularly known as dividend plans) give you an income, it's not regular. The amount and the frequency of dividends are at the discretion of the fund house.

The other drawbacks of IDCW mutual funds are:

They are deceptive
The so-called "dividends" in the IDCW plan is actually your own capital and part of your returns that is given back to you by the fund house. As soon as dividends are paid, the NAV of the fund (in IDCW) reduces by the same amount.

However, this is not the case with growth plans. In a growth plan, your returns stay within the fund and you benefit from the full advantages of compounding.

You end up paying lot of tax
The dividends that you receive under IDCW plans are added to your annual income and then taxed. This makes the IDCW plan significantly less tax efficient.

What you should do
Always go for 'growth' mutual funds. They are the most tax-efficient plans and provide better control over your investments.

Suggested read: Growth vs IDCW mutual fund: Which option suits you best?

This article was originally published on April 18, 2023.