Choosing the right option in mutual funds isn’t just a technical decision. It affects how your money grows, how much tax you pay, and how your overall wealth looks in the future. One such decision that often confuses investors is whether to go for Growth or IDCW option in a mutual fund.
If you’ve heard people talk about “dividends” from mutual funds and wondered what it really means, or why your NAV seems to drop every time you receive a payout – this blog is for you. We’ll break it down with easy examples, explain what IDCW means, how it works, and whether it suits your financial goals.
Let’s get to the bottom of IDCW, but without sounding like a textbook.
What is IDCW in Mutual Funds?
Full Form : Income Distribution cum Capital Withdrawal
Earlier, mutual funds used to call this the Dividend Option, but SEBI renamed it to IDCW to make things more transparent.
Definition of IDCW in Simple Words:
In the IDCW option, the mutual fund gives you back a part of your investment in the form of income – this could be interest earned or part of your capital gains. Sometimes, it could even be a slice of your own capital. So while it may look like you’re “getting money,” you’re not necessarily earning something extra.
The Truth Behind IDCW – Not What It Seems
Let’s say you invest ₹1 lakh in a mutual fund. You choose the IDCW option. After a few months, the fund announces a payout of ₹1,000. You feel happy – money has come into your bank account.
But what really happened?
The Net Asset Value (NAV) of your mutual fund unit dropped right after the payout. If it was ₹100 earlier, it might now be ₹99. Because that ₹1,000 came from your own investment’s value.
It’s like withdrawing cash from your wallet – yes, you’re getting the money in hand, but your wallet has less now.
This is why SEBI changed the name from “Dividend” to Income Distribution cum Capital Withdrawal – so investors would understand it’s not some extra return you’re receiving.
IDCW vs Growth Option – What’s the Difference?
1. Growth Option
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- In this option, the profit earned by the mutual fund is reinvested.
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- Your money grows inside the fund. You don’t get any cash payouts.
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- Ideal for long-term wealth creation.
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- Best for those who don’t need regular income from their investment.
Example:
You invest ₹1 lakh in the Growth option of an equity mutual fund. After 5 years, due to compounding, your money grows to ₹1.8 lakh. You didn’t get anything in between, but the value increased steadily.
2. IDCW Option
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- Here, the fund distributes the profits (and sometimes even your invested money) regularly.
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- You receive payouts in your bank account.
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- Your NAV drops with every payout.
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- Best suited only if you need income regularly, like retirees.
Example:
Same ₹1 lakh invested. The fund declares a ₹1,000 IDCW payout every 6 months. You get money regularly, but at the end of 5 years, your capital may not grow much – because part of the returns were being distributed, not reinvested.
Why Do People Still Choose IDCW?
It feels rewarding to see money hit your bank account. That’s basic psychology of trading and investing.The human brain prefers instant gratification – a small win now feels better than a bigger win later.
That’s why some investors prefer IDCW – it gives them something to “feel good” about. But in many cases, it works against long-term growth.
Also, many confuse it with dividends from stocks, which are actually a part of the profit shared by companies. Mutual fund IDCW is very different. It doesn’t always come from profits.
Tax Impact: Another Major Factor
This is where things get even more important.
- Growth Option:
You pay tax only when you sell the units. If you hold long enough (more than a year in equity funds), you get taxed at a lower rate (10% after ₹1 lakh of gains). - IDCW Option:
The payout is added to your income and taxed as per your slab. If you’re in the 30% tax bracket, you lose a big chunk of your returns.
In short, IDCW might look like income, but the tax bite is real.
When IDCW Might Make Sense
- For Retirees:
If someone needs a regular cash flow from their investments, IDCW can be a choice. - For Non-Taxpayers:
If your total income is below taxable limits, then IDCW payouts won’t be taxed. - Short-Term Parking:
If you’re putting money for a short goal and don’t mind receiving payouts, IDCW is acceptable.
But even in these cases, Systematic Withdrawal Plans (SWPs) under Growth option may be better – more tax-efficient and flexible.
Types of Mutual Fund Options
When investing in a mutual fund, you usually get to choose between:
- Growth Option
- IDCW Option (Payout)
- IDCW Option (Reinvestment)
In IDCW Reinvestment, instead of giving the payout as cash, the fund uses that amount to buy more units. But the NAV still drops, and tax is still applicable.
This is why many experts suggest sticking to Growth, especially for long-term investors.
What You Should Really Ask Yourself
Before choosing, pause and ask:
- Do I need this income regularly?
- Am I okay with lower capital growth?
- Can I handle the tax implications?
- Am I choosing this just because it “feels good” to get money back?
Understanding the psychology of trading can help us make better choices. Short-term rewards often blind us to long-term gains. But building wealth is more about patience than payouts.
Absolutely, here’s the updated section to add at the end of the blog:
How to Choose the Best IDCW Mutual Fund
1. Look Beyond Just the Payout
Many investors chase high payouts, assuming more income means a better fund. But a high IDCW payout may simply mean the fund is eroding its own capital. Focus instead on the overall health of the fund.
2. Check the Consistency of Performance
A good IDCW fund should have steady returns over 3, 5, or 10 years. Avoid funds with unpredictable ups and downs. Use tools like Value Research or Moneycontrol to compare long-term performance.
3. Understand the IDCW History
Look at the frequency and pattern of past payouts. Are they quarterly, annual, irregular? If you need regular income, find one that has a consistent payout schedule—not just a high payout once in a while.
4. Expense Ratio Matters
Even in IDCW plans, the expense ratio reduces your earnings. A lower expense ratio means more money stays in your pocket.
5. Fund House Reputation
Stick to AMCs with a strong track record and good fund management practices. In IDCW plans, trust and transparency matter even more.
6. Compare IDCW vs Growth Performance in the Same Fund
Sometimes the same fund with a Growth option performs better than its IDCW variant over time. Compare both before locking in.
7. Tax Bracket Check
If you’re in a higher tax slab, remember that IDCW payouts are taxed at slab rates. In such cases, IDCW might reduce your overall post-tax returns. Use a calculator to check how much you’ll actually receive.
8. Check for Alternatives Like SWP
Even if you’re looking for regular income, don’t jump to IDCW without comparing it with a Systematic Withdrawal Plan (SWP) from a Growth option. Often, SWPs are more tax-efficient and allow you to withdraw only what you need.
Conclusion
IDCW is not extra income. It’s your own money being returned to you, sometimes from profits, sometimes not. While it’s not a bad option in itself, it often leads investors to wrong expectations.
In most cases, the Growth option works better – it allows your money to truly compound over time, with lower taxes and more long-term value.
Before making a choice, think long-term. Think about goals, not short-term happiness. If you understand how IDCW really works, you’re already ahead of most investors.
Choose wisely. Your future self will thank you.
Congratulations on making it this far in the blog!
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