Mutual funds are one of the more popular investment options among the youth today. But there are so many varieties of mutual funds that it can be hard to decide which one is right for you. The two most common kinds are Income Distribution Cum Withdrawal or IDCW and growth mutual funds. So let’s start by helping you decide which of the two is better.
Understanding growth vs. IDCW mutual funds
Let’s start by trying to ensure that we are really clear about what these two types of mutual funds are all about.
A brief overview of the concept of growth and IDCW mutual funds
Let’s begin with IDWC mutual funds.
These mutual funds were formerly known as mutual funds with a dividend plan. This type of fund makes investments in businesses that yield dividends on a quarterly or yearly basis. The fund managers, in this case, essentially seek to invest in dividend-paying stocks with a solid track record. These are usually businesses that are profitable and are well-known in the market—often large-cap/blue-chip firms.
Such funds usually declare the potential dividend that you may receive. So if you purchased 200 units of an IDCW mutual fund program with a declared dividend of ₹1 per unit and all goes well, you will receive an additional income of ₹200. While filing your income tax returns, you will have to classify your dividend income as “Income from other sources.”
You can read more about them here.
Growth mutual funds, on the other hand, invest in growing businesses because they are likely to produce high returns. The primary goal is to increase investor investments. So instead of paying out dividends, growth companies reinvest earnings in an attempt to grow.
Investors receive profits on profits instead. This enables you to benefit from the power of compounding. However, while growth businesses can yield great returns, they are vulnerable to market volatility.
Usually, advisors suggest that investors hold on to this type of investment for three and seven years. But of course, all such advice should be taken with a pinch of salt, and your goals and needs should factor into your holding period decision.
Investors will have to pay taxes while redeeming their fund units. However, only the profits are taxed.
A comparison of growth vs. IDCW mutual funds
Now that we know what each of these funds is about, the differences should be rather clear. Yet, it helps to take a minute to examine them more closely.
An analysis of the key differences and similarities between the two
Look at the table below to understand the key differences and similarities between growth and IDCW mutual funds.
Table comparing IDCW and Growth Mutual Funds.
|Parameters||IDCW Mutual Fund||Growth Mutual Fund|
|Profits||Distributed among the investors||Reinvested into the business|
|NAV||NAV is used to pay dividends. Ex-dividend NAV is, therefore, lower.||NAV is greater because profits that are reinvested also generate income (compounding power).|
|Total Returns||Comparatively lower because of the regular dividend payments.||Relatively greater because it emphasizes long-term wealth creation.|
|Taxation||As per the individual’s income tax slab rate.||Depending on how long an investment is held, either long-term or short-term capital gains are applicable.|
|Who is it suitable for||For those looking to receive regular payments on their investment.||For people who have long-term goals and want to increase their returns.|
Advantages of growth mutual funds
Growth mutual funds come with a few advantages you may want to look at more closely. This section will help you do that.
A discussion of the benefits and opportunities
Some of the advantages of these mutual funds are:
- Potential for higher returns
- Helps with portfolio diversification
- Long-term growth in case of success
Advantages of IDCW mutual funds
As exciting as growth funds may look, IDCW funds also come with their share of pros. Let’s break them down.
A discussion of the benefits and opportunities
Some of the many advantages of IDCW funds are:
- Periodic payment of dividends
- Less risk when compared to growth funds
- Suitable for individuals with short-term goals
How to choose between growth vs. IDCW mutual funds
If all of this has not yet helped you make up your mind about which of these options works better for you, this section is sure to help.
Factors to consider when choosing between growth and IDCW mutual funds
To a large extent, the choice between IDCW mutual funds and growth mutual funds depends on the preferences and requirements of the investor. The main difference between the two options is the manner in which profits are used. In the former, the profits are divided, but in the latter, they are reinvested. However, the underlying portfolio may be the same for both.
Given that IDCW plays provide investors with some liquidity, those looking for consistent returns on their investments may prefer this option. Because in addition to the regular returns on their investments, they receive a dividend income.
However, because the investment does not feed future growth, investors lose out on the benefits of compounding.
Individuals looking to grow their money in the long term may, therefore, prefer a growth plan. Compounding is the main benefit of this choice because of the reinvestment of profits.
Before making up your mind, it may help to take your investment purpose and tax implications into account.