When you invest in a mutual fund, one of the first decisions you have to make is whether to go with the Growth or Dividend (IDCW) option.
This decision might seem small, yet it has a tremendous impact. It influences how your wealth grows, whether you receive regular dividends, and how much tax you pay on your earnings.
Unfortunately, many investors become confused between the two. Some people associate IDCW with additional income, while others are unaware that the decision might have a substantial impact on long-term wealth growth.
In this article, we’ll explain everything you need to know about Growth vs IDCW mutual funds, their differences, tax implications, and the factors you should consider before making a choice.Growth vs Dividend Mutual Funds: Which One Should You Choose?
What are Growth Mutual Funds?
Growth mutual funds are designed to maximize capital appreciation over the long term.
Here’s how they work:
When the underlying securities in the mutual fund earn profits (in the form of dividends, interest, or capital gains), the fund does not distribute this profit to investors.
Instead, the profits are reinvested back into the scheme.
This reinvestment increases the Net Asset Value (NAV) of your units.
So, as an investor, you don’t get regular payouts. Your wealth grows silently in the background, and you benefit when you redeem (sell) your units in the future.
Example of Growth Option
Suppose you invest ₹1,00,000 in an equity mutual fund (Growth option). Let’s assume the fund earns a return of 12% in a year.
At the end of the year, your investment becomes ₹1,12,000.
You don’t get any payout, but your NAV increases.
If you keep the money invested for 10 years at the same rate, the investment grows to over ₹3,10,000 due to the power of compounding.
This is why the Growth option is considered ideal for long-term wealth creation.
Who Should Invest in Growth Mutual Funds?
- Long-term investors (5+ years horizon)
- People saving for goals like retirement, child’s education, or house purchase
- Young professionals who don’t need regular cash flow
- Investors who want to take full advantage of compounding
What are Dividend (IDCW) Mutual Funds?
The Dividend option is the second choice available to mutual fund investors.
Earlier, mutual funds offered this option as “Dividend.” Still, from April 2021, SEBI renamed it as IDCW (Income Distribution cum Capital Withdrawal) to reduce confusion. Many investors assumed dividends were “extra returns.” Still, in reality, they are just payouts from the scheme’s profits (and sometimes even part of your invested capital).
Here’s how IDCW Option Works
In the IDCW option, the mutual fund scheme distributes profits to investors from time to time.
The payout is credited directly to your bank account.
After a payout is made, the scheme’s NAV reduces by the same amount.
Example of IDCW Option
If the NAV of your fund is ₹100 and the fund declares an IDCW of ₹5 per unit:
You receive ₹5 per unit in your bank account.
The NAV drops to ₹95 after the payout.
Your overall wealth remains the same, but you’ve received part of it in cash.
Who Should Invest in IDCW Mutual Funds?
- Retirees or senior citizens who want a regular income.
- Investors who prefer visible cash returns instead of long-term compounding.
- People with short investment horizons.
Note: IDCW payouts are not guaranteed. The fund house (AMC) decides if, when, and how much to distribute. Growth vs Dividend Mutual Funds: Which One Should You Choose?
Difference Between Growth and Dividend Mutual Funds
| Features | Growth Option | IDCW Option |
| Earnings | Reinvested in the fund | Paid out to investors (if declared) |
| NAV Movement | NAV rises as profits are reinvested | NAV reduces whenever a dividend is paid |
| Compounding | Higher, since returns keep reinvesting | Lower, as payouts interrupt compounding |
| Cash Flow | No regular payouts | Provides cash flow when dividends declared |
| Best For | Long-term wealth creation | Income-seeking investors |
| Taxation | Gains taxed at redemption (Capital Gains Tax) | IDCW taxed as per your income tax slab |
Factors to Consider Before Choosing Between Growth Option and IDCW
Time Frame for Investment
- If you plan to invest for a long time (5 years or more), Growth makes more sense. This is because the compounding never stops.
- If you need money quickly or have short-term goals, IDCW might be a good option.
Need for Regular Income
- IDCW is better if you require periodic cash flow, such as during retirement.
- If you don’t need payouts and can allow money to grow, Growth is preferable.
Tax Bracket
- Investors in higher tax slabs (20–30%) may find IDCW inefficient since payouts are taxed as income.
- Growth allows you to control when you redeem and optimize capital gains taxation.
Psychological Comfort
- Some investors feel motivated when they “see returns” in their bank account via IDCW.
- Others prefer watching their wealth accumulate in Growth without interruptions.
Market Conditions
- In markets that are unstable, IDCW payments may go down or stop altogether.
- Growth keeps your money invested, no matter what happens in the market.
Goal Alignment
- For wealth creation (retirement corpus, child’s education, house purchase), Growth is ideal.
- For income generation (monthly expenses post-retirement), IDCW may fit better.
Common Mistakes Investors Make
When choosing between Growth and IDCW, many investors fall into avoidable traps. Here are the most common ones:
1. Thinking IDCW is “Extra Return”
A common misconception is that IDCW is a bonus on top of your returns. In reality, it’s not an additional profit — it’s a part of your own earnings (or sometimes even your invested capital) being paid back. For instance, if a scheme declares ₹5 per unit as IDCW, the NAV falls by ₹5. Your total wealth remains unchanged; only a portion has shifted from the fund to your bank account.
2. Thinking that payouts are guaranteed
IDCW payouts are not guaranteed like fixed deposits. The AMC’s decision is based on the scheme’s profits and the conditions of the market. If the company doesn’t make sufficient profits for a long time, payouts may go down a lot or stop altogether. So, depending only on IDCW for money can be dangerous.
3. Using IDCW for Tax Saving
Some investors think IDCW has tax benefits. In reality, payouts are fully taxable as per your income slab. If you’re in the 20–30% bracket, IDCW can be very tax-inefficient compared to Growth, where you pay capital gains tax only on redemption.
4. Combining Goals
IDCW should never be used for long-term wealth accumulation since frequent payouts disrupt compounding. The Growth option is far better if you wish to pay for your children’s education or save for retirement.
Conclusion
Choosing between Growth and IDCW isn’t about picking the better option, it’s about picking the one that fits your financial goals and lifestyle. Growth works best if you can stay invested and let compounding do its magic, while IDCW is suited for those who need regular cash flow. Understanding the differences, tax implications, and your own priorities is key. Make your choice deliberately, so your investment strategy supports your goals rather than your short-term impulses.
Frequently Asked Questions (FAQs)
1. What is the difference between Growth and IDCW mutual funds?
Growth option reinvests all profits back into the fund, increasing NAV over time, while IDCW pays out profits to investors periodically, reducing NAV by the payout amount.
2. Are IDCW payouts guaranteed?
No. IDCW payouts depend on the AMC’s decision and the scheme’s profits. They can vary or may not be declared at all in some years.
3. Which option is more tax-efficient?
Growth is usually more tax-efficient, as you pay tax only at redemption (capital gains tax). IDCW payouts are fully taxable as per your income slab.
4. Can I switch from Growth to IDCW or vice versa?
Yes. Most mutual funds allow switching between options. However, switching may involve exit loads or tax implications.
5. Can IDCW be used as a regular income source?
Yes, but payouts are not guaranteed. For predictable income, investors often combine IDCW with other income instruments.