What is the difference between IDCW and growth plan in Mutual Fund? (2024)

Investing in mutual funds can be a powerful tool for wealth creation, but navigating the various options can be confusing. There are more than a thousand mutual funds available in India and on top of that many mutual fund have two different options. These two options are IDCW (Income Distribution Cum Withdrawal) and Growth plans, each catering to distinct investment goals.

In a first glance, all these make mutual funds more confusing. If you’re wondering What is the difference between IDCW and growth plan which one is right for you, this article will break down the key difference between IDCW and Growth plans and after going through it, you will be able to choose the path that best fits your financial dreams.

Understanding IDCW:

Income Distribution cum Withdrawal (IDCW) stands as a distinct mutual fund plan crafted to deliver regular income to investors. This plan revolves around the concept of generating periodic payouts, also known as dividends, from the mutual fund scheme. Imagine a steady stream of income from your mutual fund investment. That’s the essence of IDCW. This plan prioritizes distributing a portion of the fund’s profits to investors at regular intervals. Think of it like receiving mini-paychecks from your investment. This can be appealing if you depend on your investments for regular income or are nearing retirement.

However, there’s a trade-off. To distribute dividends, IDCW plans sell a part of the underlying assets. This reduces the capital appreciation potential and overall NAV (Net Asset Value) compared to Growth plans. Moreover, dividends are taxed as per your income slab, potentially chipping away at your returns.

Key Features of IDCW:

1. Regular Income:
   • The fundamental objective of IDCW is to provide investors with a reliable and steady income through periodic distributions.
2. Dividend Payouts:
   • In IDCW plans, you will receive dividend payouts from the mutual fund scheme, serving as a consistent source of regular income.
3. Tax Implications:
   • When you submit income tax, the dividend from these IDCW plans will be shown as a income and you will be taxed according to your income tax slab. If you receive dividend of more than 5000 rupees in a financial year, it will attract TDS of 10%.

Understanding Growth Plan:

In contrast, a Growth Plan in mutual funds is designed for investors with a primary focus on capital appreciation rather than regular income. Under a Growth Plan, any profits earned by the mutual fund scheme are reinvested, fostering the potential for compounding returns. This plan caters to individuals looking for long-term wealth creation and the benefits of compounding over time. This can lead to significantly higher returns over the long term, especially with the power of compounding.

But be prepared for a delayed gratification. You won’t see regular income with Growth, and your initial investment might take time to show significant growth. This plan is ideal for long-term investors with a higher risk tolerance, seeking wealth creation for future goals like retirement or children’s education.

Key Features of Growth Plan:

1. Capital Appreciation:
   • The core goal of a Growth Plan is to achieve capital appreciation by reinvesting profits back into the scheme, allowing for the potential for substantial returns over time.
2. No Regular Payouts:
   • Unlike IDCW, Growth Plans do not provide regular income through dividend payouts. Instead, investors benefit from the potential for higher returns over the long term.
3. Tax Efficiency:
   • Gains from a Growth Plan are subject to capital gains tax only when the investor decides to redeem their units, making it a more tax-efficient option. If you sell your funds within 365 days it will attract Short term capital gain (STCG) of 15% and if you sell it after one year it will attract 10% Long term capital gain tax (LTCG) above 1 lakh. So, up to 1 lakh is tax free.

So, Which One is Right for You?

The choice between IDCW and Growth boils down to your investment goals and risk appetite.

Difference between IDCW and Growth

1. Income Generation:
   • IDCW focuses on generating regular income through dividend payouts, making it an attractive option for those seeking a consistent cash flow.
   • Growth Plans prioritize capital appreciation, with no regular income distributions. This appeals to investors with a long-term perspective aiming for wealth creation through the power of compounding.
2. Investor Profile:
   • IDCW is well-suited for investors looking for regular income, especially retirees or those in need of a steady cash flow.
   • Growth Plans are ideal for individuals with a long-term investment horizon who prioritize wealth creation over immediate income.
3. Tax Treatment:
   • IDCW can attract TDS if it is over 5000 in a financial year and the dividend you earn will add to your income and your will be taxed according to income tax slab.
   • Growth Plans are more tax-efficient, as capital gains tax is applicable only when the investor decides to redeem their units. This allows for potential tax savings over the investment tenure. Remember, in Growth plans tax is applicable according to STCG or LTCG, as we discussed earlier. Up to 1 lakh is tax free in LTCG.

Invest Wisely and Choose Carefully

Understanding the difference between IDCW and Growth plans is crucial for making informed investment decisions. By aligning your plan with your financial goals and risk tolerance, you can pave the path for a rewarding journey in the world of mutual funds.

Remember, it’s not a one-size-fits-all approach. You can even opt for a hybrid strategy, with investments in both IDCW and Growth plans based on your specific needs and risk profile. This way you won’t have to worry about the difference between IDCW and Growth plan and you can reap the benefit of both plans.

Further Exploration:

• Consult a financial advisor: For personalized advice, seek guidance from a qualified financial advisor who can assess your individual needs and recommend suitable investment options.
• Research mutual funds: Before investing, thoroughly research the specific mutual funds you’re considering, studying their performance, holdings, and investment strategies.
• Stay informed: Keep yourself updated with market trends and financial news to make informed investment decisions throughout your journey.

Conclusion: What is the difference between IDCW and Growth plan

Choosing between IDCW and Growth Plans in mutual funds is a decision that hinges on various factors, including your financial goals, risk tolerance, and investment horizon. IDCW plans cater to those seeking regular income, while Growth Plans are tailored for long-term investors aiming for wealth creation. By understanding the nuances of IDCW vs Growth, investors can make informed decisions aligned with their unique financial objectives. Remember to assess your individual needs, consult with financial experts if necessary, and embark on your investment journey with confidence.

Happy investing!

Note: This article is not financial advice. Please consult a qualified financial advisor before making any investment decisions.

Frequently Asked Questions (FAQs):

1. What is the primary purpose of IDCW plans?
   • IDCW plans are primarily designed to provide investors with a regular and steady income stream through periodic dividend distributions from the mutual fund scheme.
2. Who benefits most from IDCW plans?
   • IDCW plans are particularly suitable for investors seeking consistent cash flow, such as retirees or those requiring regular income to meet financial obligations.
3. Are IDCW payouts guaranteed?
   • No, IDCW payouts are not guaranteed. They are contingent on the performance of the mutual fund scheme and the availability of distributable surplus.
4. How does the taxation of IDCW differ from Growth Plans?
   • In IDCW plan, if your total dividend in a financial year is more than 5000, you will attract TDS and also your dividend will be added to your yearly income when you pay your income tax, just like other interest incomes. In contrast, Growth Plans are more tax-efficient, as capital gains tax is applicable only upon redemption. If you sell your funds within 365 days it will attract Short term capital gain (STCG) of 15% and if you sell it after one year it will attract 10% Long term capital gain tax (LTCG) above 1 lakh.
5. What is the main objective of Growth Plans?
   • Growth Plans in mutual funds aim to achieve capital appreciation by reinvesting profits back into the scheme, allowing for the potential of compounding returns over the long term.
6. Who should consider investing in Growth Plans?
   • Growth Plans are well-suited for investors with a long-term investment horizon who prioritize wealth creation and are willing to forgo regular income distributions in favor of potential higher returns.
7. Are there any tax benefits associated with Growth Plans?
   • Gains from Growth Plans are subject to capital gains tax only when the investor decides to redeem their units. This tax efficiency can be advantageous for investors over the investment tenure.

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