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Tata Capital > Blog > IDCW (Dividend) Option Vs Growth Option – Which One Should I Choose?

IDCW (Dividend) Option Vs Growth Option – Which One Should I Choose?

IDCW (Dividend) Option Vs Growth Option – Which One Should I Choose?

If you've ever invested in mutual funds, you know that both debt and equity mutual funds come divided into Income Distribution cum Capital Withdrawal (IDCW), previously known as dividend, and growth options. Often investors end up confused as to which is better. However, the idea that any one option is better than the other is a fallacy.

Your choice will entirely depend on your financial goals, investment horizon, and tax situation. You may also opt for a combined investment, wherein you fill your kitty with both IDCW and growth funds.

What is the IDCW option in mutual funds?

Here, the profits earned by a mutual fund are paid out to investors, as dividends, at pre-decided intervals. For most IDCW (previously called dividend mutual funds), an annual payout is the most common interval. Other schemes may offer daily, monthly and quarterly payouts as well.

Noteworthy points for IDCW funds:

  • SEBI mandates that dividends can be paid out only from profits earned by the respective mutual fund.
  • Dividend payout rates may vary with each payout cycle.
  • Dividends paid on both equity and debt mutual funds are taxed as per the investor's income tax slab. In case the investor doesn't have any source of income other than mutual funds, a mandatory TDS is deducted at 10% from the total dividend income. However, no deduction takes place if the dividend distributed is Rs. 5000 or lower.  

Additional Read: Safe investments to ride out market volatility

What is the growth option in mutual funds?

In growth funds, profits earned are reinvested in the scheme, and no interim payout takes place. Here, you stand a chance to earn profits on profits.

Noteworthy points for growth mutual funds:

  • Typically, the Net Asset Value or NAV of growth mutual funds is always higher than the IDCW option. Simply because of profits being reinvested into the scheme to earn compounded returns.
  • You pay tax on growth mutual funds only at the time of redemption. If you’ve invested in growth type equity mutual funds, short term capital gains (less than 12 months) are taxed at 15%. As for long term capital gains (more than 12 months) are taxed at 10%. However, any capital gains up to Rs. 1 lakh is tax-exempt.
  • As for growth type debt mutual funds, short term capital gains (less than 36 months) are taxed according to your income tax slab. At the same time, long term capital gains are taxed at 20%.

IDCW (Dividend) vs growth mutual funds – which one should I choose?

The primary difference between the IDCW and growth option boils down to the returns you will earn from compounding. While IDCW option makes more sense if you want to earn a regular stream of income through mutual funds, growth option is ideal if you have a long investment horizon as you get the benefit of compounding.

Key difference between IDCW and growth mutual funds

Points of Difference  Growth OptionDividend Option
NAV  Has a higher NAV since the re-invested profit can increase in value over time.  Has a comparatively lower NAV since dividend payouts are deducted from the NAV.
Profits  Re-invested into the schemeDistributed to investors
Total ReturnsSince the growth option focuses on long-term wealth creation, total returns are more than the dividend option.  Since dividend option provides periodic payouts to the investors, the final corpus will be less than the growth option.
Tax impactTax applicable on long-term and short-term gains when redeemed.Dividend income taxed as per the investor's slab rate.

Besides, experts recommend the IDCW option when the market trajectory is moving upwards. During this time, the NAVs of funds rise consistently, and there is a higher likelihood of a fund declaring significant dividends. 

In contrast, wealth accumulation may be slower and more spread out for the growth option, but the end return will be higher when compared to the IDCW option.

Additional Read: Know all about MF Central – Newly Launched Service from CAMS and Kfintech

Over to you

Want to invest in one or both IDCW and growth mutual funds? If yes, do it through Tata Capital Moneyfy – One of India’s most trusted financial investment portals.

Compare and invest in a wide range of top-rated mutual funds, SIPs, fixed deposits, and much more using our Moneyfy website or Moneyfy app. 

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