Growth vs IDCW in Mutual Funds

What is the IDCW option?

IDCW stands for Income Distribution cum Capital Withdrawal. In this option, the mutual fund distributes money earned from time to time, depending on the scheme’s terms. These earnings could be dividends in case of equity funds and interest in case of debt funds. However, the payouts are not a guaranteed fixed monthly income.

An IDCW option is not an extra sum distributed by the fund. It is still a part of your returns. So, when you receive a payout, the NAV falls by the same amount. The amount distributed can also include a withdrawal of your capital.

Growth vs IDCW: A detailed comparison

Here’s an in-depth comparison between growth and IDCW options that may help you make the right choice.

The basic difference between growth vs IDCW is what happens to the money earned by the fund. In the growth option, the money stays invested in the fund. In the IDCW option, the fund pays some of that money to you from time to time.

A practical scenario

Imagine you invested ₹1 lakh in an equity fund at an initial NAV of ₹100. You receive 1,000 units. Over the year, the underlying assets gain 20%. Here’s how your investment would turn out depending on the option you choose:

In the beginning, the total returns are the same in both options. But with Growth, the full ₹1,20,000 stays invested and can continue to grow in the second year. But with IDCW, only ₹1,15,000 remains invested after the payout, so this is the amount that can grow further.

Growth vs IDCW: Which one should you consider?

There are certain points you should look at before making the choice, such as:

• You goals: If you’re investing for a long-term goal such as a home, education, FIRE or wealth creation, keeping your money invested may be more important than receiving payouts.
• Need for regular income: If you need periodic cash flow from your investments, IDCW may be worth considering. But you should be aware that payouts are not guaranteed.
• Investment horizon: If you are investing for many years and don’t need the money along the way, the growth option can allow you to stay invested longer and grow better compared to IDCW.
• Taxation: IDCW distributions are taxed when you receive them, while in the Growth option, you pay tax only when you redeem units. However, the actual tax amount depends on your holding period, type of fund and applicable tax rules.

The ultimate choice is really about what you want your investment to do for you. However, don’t choose IDCW only to earn monthly or quarterly income. The fund may not declare regular payouts. The frequency and amount depend on the scheme and its terms.

The bottom line

Comparing growth vs IDCW isn’t about chasing the option that gives you better returns. You should first start with setting a financial goal. Do you need money during your investment horizon, or are you happy leaving it invested for years? Based on that, you can narrow down your choice.

On Millions, you’ll see the option name along with the mutual fund. So you can choose the Growth or IDCW option as per your preference. Once you select the suitable option, you can start an SIP with a small amount and stay consistent. As your income and savings grow, you can increase your investment to match your financial goals.