IDCW vs. Growth - Which is the better option for Mutual Fund investment?

Know the difference between IDCW and growth options in mutual funds, and how to choose the better option based on varying criteria.
IDCW vs. Growth
4 mins
15 Feb 2024

Mutual funds offer you the opportunity to invest in a diversified portfolio of securities, such as stocks, bonds, and other assets. However, when you invest in a mutual fund, you must choose between two options: IDCW (income distribution cum capital withdrawal) or growth.

What are these options and how do they affect your returns? Let’s find out.

What is the growth option?

The growth option in mutual fund is the one where you do not receive any regular pay-outs from the fund. Instead, all the profits made by the fund are reinvested in the scheme, increasing the value of your units. This means that you can benefit from the power of compounding, as your money grows faster over time. The growth option is suitable for investors who have a long-term horizon and do not need any regular income from their investments.

What is the IDCW (income distribution cum capital) option?

The income distribution cum capital withdrawal or IDCW option in mutual fund is the one where you receive regular pay-outs from the fund. These pay-outs are called income distribution cum capital withdrawal or IDCW, and they are a part of the profits made by the fund. The IDCW option is suitable for investors who need regular income from their investments, such as retirees or those who have short-term goals. It is important to note that regular payout is not guaranteed. Fund manager can declare dividends only when then fund generates surplus funds.

What are the differences between IDCW and growth options in mutual funds?

There are some key differences between IDCW and growth options in mutual funds, such as:

  • Returns: The IDCW option gives you lower returns than the growth option, as you receive only a part of the profits made by the fund. The growth option gives you higher returns, as you benefit from the compounding effect of reinvesting the profits.
  • Risk: The IDCW option reduces your risk, as you receive regular pay-outs from the fund, which can act as a cushion in case of market volatility. The growth option increases your risk, as you are exposed to the full fluctuations of the market, and you do not receive any pay-outs to offset the losses.
  • Liquidity: The IDCW option gives you higher liquidity, as you can access your money anytime through the pay-outs. The growth option gives you lower liquidity, as you have to redeem your units to access your money, which may incur exit load or capital gains tax.

Growth vs. IDCW mutual funds: which is better?

There is no definitive answer to which option is better, as it depends on your investment objective, risk appetite, time horizon, and tax status. However, some general guidelines are:

  • Choose the growth option if you have a long-term goal, such as retirement, child’s education, or wealth creation. This option will help you maximise your returns and benefit from the power of compounding.
  • Choose the IDCW option if you have a short-term goal, such as emergency fund, vacation, or debt repayment. This option will help you generate regular income and reduce your risk. It is important to note that there is no definite income at regular interval. The income will be paid out if there is any distributable surplus.
  • Choose the growth option if you are in a lower tax bracket, as you will pay less tax on your capital gains when you redeem your units. Choose the IDCW option if you are in a higher tax bracket, as you will pay less tax on your pay-outs, which are treated as dividends.

Taxation on IDCW and growth options

The taxation on IDCW and growth options in mutual funds varies depending on the type of fund and the holding period. Here are some basic rules:

  • For equity funds, the IDCW is tax-free in the hands of the investor. The growth option is taxed at 15% for short-term capital gains (STCG) and 10% for long-term capital gains (LTCG), with a threshold of Rs. 1 lakh.
  • For debt funds, the IDCW is added to the income of the investor and taxed as per the applicable slab rate. The growth option is taxed at the slab rate for STCG and 20% with indexation benefit for LTCG.
  • For hybrid funds, the taxation depends on the proportion of equity and debt in the fund. If the equity component is more than 65%, the fund is treated as an equity fund. If the equity component is less than 65%, the fund is treated as a debt fund.

Conclusion

IDCW and growth are two options that you can choose when you invest in a mutual fund. Both options have their own advantages and disadvantages, and you should select the one that suits your investment goal, risk profile, time horizon, and tax status. You can also switch between the options, subject to exit load and tax implications. However, before you make any investment decision, you should consult your financial advisor and do your own research.

Frequently asked questions

Is it possible to switch from IDCW to a growth option?

Yes, it is possible to switch from IDCW to a growth option, but it may involve exit load and tax implications.