IDCW Vs Growth

November 16, 2023

IDCW Vs Growth

The main difference between the IDCW (Income Distribution and Capital Withdrawal) and Growth options in mutual funds is that in the IDCW option, profits are periodically distributed to investors, while in the Growth option, all profits are reinvested in the fund, aiming for capital appreciation.


Growth Option In Mutual Fund

The Growth option in mutual funds is for people who want to invest for a long time and are mostly interested in capital growth. When you choose this option, you opt for your earnings—be it dividends or interest—to be reinvested in the mutual fund scheme. 

This reinvestment happens automatically, purchasing additional fund units on your behalf. Over time, this leads to the compounding of returns, which can significantly boost the value of your investment.

Consider Mr. Sharma, a 35-year-old investor from Mumbai. He invests ₹1 lakh in a Growth option mutual fund with an annual return of 12%. Over 10 years, without any additional investment, his ₹1 lakh would grow to approximately ₹3.11 lakhs, thanks to the power of compounding.

IDCW Meaning

IDCW, or Income Distribution cum Capital Withdrawal, is another mutual fund option that caters to investors who prefer to receive periodic payouts. This could be monthly, quarterly, or annually, depending on the fund’s policy. 

The payouts come from the profits generated by the fund, which could include dividends from stocks, interest from bonds, or even capital gains from the sale of securities. This option is particularly beneficial for individuals like retirees or those with regular financial obligations who need a consistent income stream.

Suppose Mrs. Verma, a 60-year-old retiree, invests ₹10 lakhs in an IDCW mutual fund that offers a monthly payout. With a 7% annual return, she can expect to receive around ₹5,800 monthly, providing her with a steady income.

Growth Vs IDCW

The primary difference between Growth and IDCW options is that in case of Growth, profits are reinvested, aiming for long-term capital appreciation. On the other hand, in IDCW, profits are distributed to investors as periodic payouts. 

Basis of ParametersIDCW OptionGrowth Option
ObjectiveRegular Income: Focuses on providing a regular income stream.Capital Appreciation: Aims for long-term capital growth.
Profit HandlingDistributed: Profits are distributed as periodic payouts.Reinvested: All profits are reinvested back into the fund.
Tax EfficiencyLower: May incur taxes on each payout.Higher: Generally more tax-efficient due to the compounding of returns.
SuitabilityRetirees, Short-term: Suitable for those needing regular income.Long-term Investors: Ideal for those with a long-term investment horizon.
Compounding EffectNo: Does not benefit from the power of compounding.Yes: Benefits from the power of compounding as profits are reinvested.
LiquidityHigher: Offers higher liquidity due to regular payouts.Lower: Has lower liquidity as profits are reinvested.
Risk ProfileLow to Moderate: Generally involves lower risk but may offer lower returns.Moderate to High: Involves higher risk but has the potential for higher returns.

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IDCW Vs Growth – Quick Summary

  • Growth focuses on capital appreciation by reinvesting profits, while IDCW aims for regular income through periodic payouts.
  • Growth is more tax-efficient as it allows for the compounding of returns, whereas IDCW may have tax implications on each payout.
  • Growth is usually better for long-term investors, while IDCW is usually better for retirees and others who need a steady income.
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IDCW Vs Growth  – FAQs  

1. What Is The Difference Between IDCW Option And Growth Option?

The key difference between IDCW and Growth Option is how profits are handled. Growth reinvests them to increase the value of the capital, and IDCW gives them out as regular income. 

2. What is the advantage of IDCW mutual fund?

IDCW offers the advantage of regular income, making it suitable for retirees or those with periodic financial needs.

3. Should I invest in IDCW?

If you require a consistent income stream and are not solely focused on capital appreciation, IDCW could be a good fit for you.

4. What is the difference between regular and IDCW?

The key difference between a regular plan and an IDCW option is that in a regular plan, you invest through an intermediary like a broker, who receives a commission from the mutual fund company. In contrast, IDCW (Income Distribution cum Capital Withdrawal) allows mutual fund investors to receive periodic payouts. IDCW is available in direct and regular plans.

5. Is IDCW reinvestment taxable?

Yes, the reinvestment of IDCW (Income Distribution cum Capital Withdrawal) is subject to taxation. IDCW reinvestment is considered annual income and taxed according to the tax slab. However, tax treatment may vary by mutual fund type (equity or debt) and holding period. 

To gain a better understanding of the topic and access more information , explore the articles below that cover mutual funds, stock market insights, trading strategies, and organizational perspectives.

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