Growth Option vs IDCW - Which One to Choose While Investing in Mutual Funds?
Investing in mutual funds has gained huge popularity among both old and new investors alike. However, there are scores of mutual fund schemes in the market, and it could be a challenge to pick the right one that suits your requirements, risk profile, and investment horizon. One such challenge could be to decide between the Income Distribution cum Capital Withdrawal (IDCW) vs Growth Option. Read on to learn more about what these mean and which could be the better option for you.
Understanding Growth Option
The Growth Option and Income Distribution cum Capital Withdrawal (IDCW) are different choices that allow investors to select how and when they receive the earnings from their investments. This decision is crucial as it impacts investors’ earnings and taxes.
Growth Option is an investment option in mutual funds wherein no regular payouts or dividends are distributed to the investors. Under this option, the profits and dividends are reinvested into the scheme to drive growth further. As a result, the net asset value (NAV) continues to grow and helps with capital appreciation.
Features of Growth Option
Given below are some of the features of Growth Option:
- No Regular Payouts: Since the profits and earnings are reinvested into the fund, investors do not receive a regular payout or dividends under the Growth Option.
- Capital Growth: One of the key features of the Growth Option is that the profits and dividends are reinvested, which results in the capital growing and compounding over time.
- Taxation: Under the growth option, taxes are levied only when investors redeem their units.
- Longer Horizon: The growth option is usually preferred for the longer horizon, as the reinvestment of profits will compound in the long term.
Understanding IDCW
As the name suggests, the Income Distribution cum Capital Withdrawal option offers investors the opportunity to receive regular payouts and dividends. Consequently, the capital invested in the scheme reduces over time. Previously, the IDCW option was known as the dividend plan.
Features of IDCW
Given below are the important features of IDCW:
- Regular Payouts: The key feature of IDCW is that the investor receives regular payouts and dividends. This allows an investor to receive a regular income.
- Capital Withdrawal: The payouts can be a combination of earnings and also invested capital, which results in a lower net asset value (NAV).
- Payout Frequency: The payouts depend on the earnings of the fund and could be made monthly, quarterly, or yearly.
- Taxation: Since the income from IDCW is considered income from other sources, the payouts will be taxed as per the investor’s tax slab.
How Does IDCW Work?
Since the IDCW allows investors to receive regular income along with capital withdrawal, it results in a reduction in the NAV. Let’s look at an example to understand it better.
Initial Investment: Rs 50,000
NAV: Rs 20
Units Purchased: 2,500
Dividend Declared: Rs 3
Payout to Investor: 2,500 x 3 = Rs 7,500
NAV after Payout: Rs 20 - Rs 3 = Rs 17
Invested Amount After Payout: 2,500 x Rs 17 = Rs 42,500
Factors to Consider Before Choosing Growth Option and IDCW
Here are a few factors that investors must consider while choosing between growth option and IDCW:
Investment Goals
Knowing your investment goals is necessary before making any investment decisions. If an investor is looking for capital appreciation and wants to stay invested for the long term, then the Growth Option is a suitable one, compared to someone with a shorter time horizon.
Risk Appetite
The IDCW option is comparatively less risky in the short term, while the growth option might be more volatile. Moreover, regular payouts from the IDCW option reduce the overall market exposure compared to the Growth Option.
Income Requirement
Another important factor to consider is the growth requirement. The Growth Option is more suitable for investors who do not require a regular income or can stay invested for a longer period. However, the IDCW option is more appropriate for investors looking for regular earnings.
Tax Implications
Considering the tax implications is also a major factor in the Growth Option vs IDCW story. The tax implications can vary depending on the investor’s tax slab, investment horizon, and payout option. It is advisable to consider how taxation would impact an investment before selecting a payout option.
Key Differences between Growth Option and IDCW
The table below shows the significant differences between growth option and IDCW based on certain parameters:
Growth Option vs IDCW |
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Parameters |
Growth Option |
IDCW |
|
Payout |
No regular payouts. Earnings are paid out only when the investor redeems the units. |
The earnings under IDCW are distributed as dividends among the investors. |
|
Capital Appreciation |
Profits and dividends are reinvested, which results in capital appreciation and growth due to compounding. |
Payouts include earnings and capital invested, which results in a lower NAV and a reduction in the capital invested. |
|
Tax Implications |
Earnings are subject to taxes only when the investor redeems the units. |
Payouts can be subject to taxation depending on the investor’s tax slab. |
|
Investment Horizon |
Suitable for longer investment horizons as the capital appreciates and compounds in the long term. |
Suitable for a shorter investment horizon to receive regular payouts. |
Conclusion
While deciding on IDCW vs Growth Option, it is important to consider various factors and select the option that best aligns with your investment objectives, risk appetite, and need for income. Both options have their own benefits and can cater to investors looking to achieve various goals.
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