Growth Vs IDCW option in Mutual Funds: Which is a Better Option?
Mutual fund Schemes offer two different options, and it's important to understand the differences between them before investing. One such option is the IDCW (Income Distribution cum Capital Withdrawal) option, and the other is the growth option.
Difference between Growth and IDCW Option in Mutual Funds
The key differences between the Growth and IDCW (Income Distribution cum Capital Withdrawal) options in mutual funds are:
| Category | Growth Option | IDCW Option |
|---|---|---|
| Objective | Aims to focus solely on capital appreciation over the long term by harnessing the power of compounding | IDCW Payout: Aims to provide investors with regular income in the form of periodic dividend payouts. IDCW Re-investment: Aims to offer compounded returns through reinvestment of dividend |
| Capital Gains | All the capital gains are accumulated back into the fund, leading to growth in the Net Asset Value (NAV). | IDCW Payout: The dividends are distributed to the investors in the form of periodic dividend payouts. Hence, the NAV comes down to the extent of the dividend payout. IDCW Re-investment: The dividends of the mutual fund are reinvested back into the scheme for additional units. The NAV comes down to the extent of the dividend payout. |
| Taxation | Taxed at the time of redemption as capital gains. | IDCW Payout: Dividends are taxed as and when they are received as per the tax slab of investors. IDCW Re-investment: Dividends are taxable in the hands of the investors as per their tax slab. |
| Target Investors | Suitable for long-term investors seeking capital appreciation. | IDCW Payout: Ideal for investors seeking regular income from their investments. IDCW Re-investment: Ideal for investors who want to avail the benefit of compounding. |
| Compounding Impact | Maximizes the benefit of compounding over time due to reinvestment of capital gains. | IDCW Payout: Limited compounding impact due to regular dividend payouts. IDCW Re-investment: Maximizes the benefit of compounding over time due to reinvestment of dividends. |
| Frequency of Income | No predetermined frequency of regular income. | IDCW Payout: Periodic dividend payouts, which may be weekly, monthly, quarterly, half-yearly, or annually. IDCW Re-investment: No predetermined frequency of regular income. |
IDCW Reinvestment Plan vs. Growth Plan:
The growth and the IDCW Reinvestment plan may sound pretty similar. However, there are few fundamental differences:
A dividend of 5 INR per unit is declared by the fund
Taxation of IDCW Reinvestment plan and Growth plan:
For the IDCW Reinvestment plan all dividends received after April 1, 2020, will be taxable as per the investor’s tax slab. Besides, a 10% TDS is applicable on dividends distributed by Mutual Fund schemes if the dividend amount exceeds Rs. 5,000. This means, in the above example, the reinvested amount will be lower due to the TDS applicable on dividends of mutual funds. Consequently, the final value of investments will also be lower.
For the Growth plan, taxes are applicable on capital gains when the units are sold. In case of Equity schemes, *if the holding period of units is within 12 months then a short term capital gains tax (STCG) of 20% will be applicable. If the holding period is greater than 12 months then a long term capital gains tax (LTCG) of 12.5% will be applicable.
Which Option to Choose?
The choice between the Growth and IDCW options depends on the investor's financial goals and investment horizon:
Growth Option: May be suitable for long-term investors who are focused on capital appreciation and wealth creation. [1] At Zerodha Fund House, we offer schemes with only Growth option, you may check it out on our website here.
IDCW Option: Ideal for investors who look for a regular income from their investments. The periodic dividend payouts may provide a steady stream of income.
It's important to consider factors like your investment objectives, risk appetite, and tax implications when deciding between the Growth and IDCW options. Ultimately, the choice between the Growth and IDCW options should be based on your individual investment needs and preferences.
Is it possible to switch from IDCW to a growth option?
Yes it is possible to switch from the IDCW (Income Distribution Cum Capital Withdrawal) option to a Growth option in mutual funds. You would need to redeem the units of the IDCW option and buy units of the growth option which may involve exit loads/capital gain taxes.You can also switch through a process commonly known as a switch transaction. Through this option you don’t have to redeem the units yourself, the redemption is taken care of without any manual intervention. However, the ability to switch between options may depend on the terms and conditions set by the mutual fund scheme and the fund house/AMC managing it.
Conclusion
In summary, the choice between the Growth and IDCW options in mutual funds depends on the investor's financial goals, investment horizon, and personal preferences. The Growth option is suitable for long-term investors seeking capital appreciation, while the IDCW option is ideal for those who require regular income from their investments.
Investors should carefully consider factors such as the potential for capital growth, the impact of compounding, the frequency of income distribution, and the tax implications before making their decision. It's also important to align the chosen option with your overall investment strategy and risk tolerance.
Ultimately, there is no one-size-fits-all solution, and the decision should be based on a thorough understanding of your financial objectives and personal circumstances.
[1]: Please note that the details provided here represent current offerings and are subject to change. This information should not be viewed as financial advice or a recommendation to invest in Zerodha Mutual Fund schemes. Investors are encouraged to consult with their financial advisor for personalized investment advice. The ETFs offered by Zerodha Mutual Fund do not have options except for Zerodha Nifty 1D Rate Liquid ETF, which offers Growth Option.
* Effective from on July 23, 2024
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
Published on Aug 01, 2024
