Selecting between growth and IDCW (income distribution cum capital withdrawal) is a standard requirement when investing in mutual funds. Despite this, a significant number of investors make the decision without grasping what each option entails.
It is common for investors to initially choose the dividend option when entering mutual funds. With experience, they may lean towards compounding their investments rather than receiving payouts. Even so, unfamiliarity with the switching mechanism means many remain in their original choice.
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When making their first mutual fund investment, individuals are usually asked to select from three alternatives: growth, dividend, or dividend reinvestment.
In a growth plan, profits are not paid out but reinvested within the fund itself. This compounding effect enables the investment to expand over time, reflected in a rising NAV.
Under the IDCW option, a portion of the scheme’s gains is distributed to investors rather than being reinvested. These payouts are not assured and typically lead to a drop in the fund’s NAV, which can weigh on long-term returns. The Securities and Exchange Board of India introduced the IDCW label to make it clear that such distributions draw from the investor’s own capital and accrued gains.
In the growth option of a mutual fund, any returns generated are channelled back into the scheme rather than paid out. This allows the investment to compound over time, steadily increasing in value as the fund’s net asset value rises.
Switching from the dividend option to the growth plan is relatively straightforward, typically requiring only a form to be completed, with the change processed within 24 hours. However, moving from dividend reinvestment to dividend payout follows a different route, involving a written request to the fund house and a processing period of a few days.
Any move between the dividend and growth options is treated as a redemption followed by a fresh investment, as each plan carries a distinct Net Asset Value.
A switch could come with exit charges and tax implications linked to the holding period. It is advisable to evaluate whether an exit load will apply before proceeding. In some cases, waiting for a short period may help sidestep these costs altogether.
“In case of Mutual Fund investments, switching your investments from one option to another within the same scheme is considered as a sale (redemption). Hence, the switch will attract exit load and capital gains tax depending on how long you had invested,” reads a blog by Mutual Funds Sahi Hai website.
Growth plans typically witness a gradual increase in NAV over the long term due to reinvestment of gains. On the other hand, IDCW options may show a stagnant or lower NAV, since distributions are made to investors.
The growth option is better aligned with long-term capital appreciation goals, whereas IDCW caters to investors looking for periodic payouts.
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