Most people who are familiar with mutual funds know that it offers two options to investors to decide on returns on investment from both debt & equity mutual funds. They are Distribution cum Capital Withdrawal (IDCW), earlier known as a dividend, and growth plan.
First, let’s understand what is IDCW in mutual funds and the growth plan in mutual funds.
What is IDCW in mutual funds: In the IDCW Plan, the investors can choose to receive the returns from their investments at a regular interval. The frequency of dividends can be daily, monthly, quarterly or annual. Let’s understand IDCW with an example. Consider that you have invested in 5,000 units of a Mutual Fund scheme. Now, the fund performs and declares a dividend of Rs. 2 per unit. So, you will get Rs. 10,000 as dividend from your scheme.
On the other hand, in the Growth Plan of a mutual fund scheme, the investors put the returns back to the mutual fund scheme. Herein, the investors do not opt to receive returns at regular intervals. In this plan, investors receive a payout from the fund only after selling the units.
While both have different ways of getting returns from a mutual fund scheme, the underlying portfolio of both the Dividend Plan and Growth Plan is the same.
Now that you’ve understood what is IDCW in mutual fund, let’s understand the returns of both the plans by assigning some differentiating factors:
NAV: Dividend (IDCW) has a comparatively lower NAV than the growth plan. That is because the dividend payouts given to investors get deducted from the NAV. The growth plans have higher NAV because the profits get reinvested into the scheme and increase over time.
Taxation: One of the differentiating factors that affect the overall return of the plans is tax. In dividend plans, the dividend from equity funds is tax-free. However, dividends from non-equity funds get levied with tax. Mutual funds pay the tax from the payout amount, and then the net amount is distributed as dividends to investors.
In the case of the growth plan, the tax is levied because of capital gains. If investors hold an equity mutual fund investment for more than a year, the profits (long-term capital gain) will not be taxed. But, if the investment is held for less than a year, the profits (short-term capital gain) will be taxed at 15%.
Profit generation: In a dividend plan, the profits get distributed to the investors. On the other hand, the growth plan reinvests those profits into the fund.
Overall Returns: The final corpus of the dividend plan is often less than the growth plan. That is so because it provides periodic payouts to the investors, and the amount gets deducted from NAV.
The growth plan focuses on long-term wealth creation. Hence the total returns are more than the dividend plan.
Which is the best option for investors to choose IDCW or the growth plan?
Well, the answer depends on the investor’s choice and needs.
It may also depend on whether the investor wants to invest in equity or debt funds. Keep in mind what is IDCW in mutual funds & the investor wants regular funds which can generate a steady income, it is best to go with IDCW mutual funds. Additionally, with the IDCW plan, you get a facet of liquidity on your investments as some of your invested money gets back to you regularly, as clearly mentioned in the definition of what is IDCW in mutual funds. However, the downside of this regular payout is it destroys the compounding gains which you can get in growth plans. After learning what is IDCW in mutual funds, it is very clear that IDCW mutual funds may be beneficial only if the market performs well all the time. In low market conditions, the investors may lose out on the payout. Thus, investors preferring IDCW mutual fund investors should be ready to take the risk factor into account.
On the other hand, if the investor wants to hold on to their investment and grow money for a long time, then the growth plan is the best option to go for. Long-term investments help the investors in making wealth and achieving their future goals. That is because you get the advantage of a compounding process wherein the returns from your investment get reinvested back into the scheme, which is not the case in the dividend plan.
However, when it comes to tax, both plans incur it. Capital gain taxes apply to growth mutual fund schemes, whereas in IDCW, the mutual funds pay the tax from the payout amount. If you see it from a broader perspective, a growth plan has more potential to give better returns. However, as we said, it all depends on you. To make the right decision between the two, you must be completely aware of what is IDCW in mutual funds and growth plans. Also, make sure to assess your risk profile, investment duration, and goals before investing in mutual funds through these plans.