IDCW vs Growth Plans: Which Suits Your Financial Goals?
Mar 22, 2024
4 MinutesWhen it comes to investing in mutual funds, two prevalent options are the Income Distribution Cum Withdrawal Plan (IDCW) and the Growth option. The IDCW plan distributes the mutual fund scheme's profits to investors periodically, whereas in the Growth plan, profits are reinvested into the fund. Let's explore the key differences.
Comparison of IDCW and Growth Plans:
- Fund Profits: IDCW distributes profits to investors; Growth option reinvests them.
- NAV Impact: IDCW sees a decrease in NAV post-dividends; Growth maintains a higher NAV through reinvestment.
- Total Returns: IDCW offers lower long-term returns due to regular payouts; Growth focuses on compounding for wealth accrual.
- Taxation: IDCW dividends are taxed per individual tax slabs, while Growth attracts capital gains tax based on the holding period.
- Suitability: IDCW suits those desiring regular income, while Growth caters to long-term wealth creation goals.
Consider an example to see how dividends affect investment value in both IDCW and Growth plans:
| Parameters | IDCW Plan | Growth Plan |
|---|---|---|
| Initial NAV (1st April 2021) | INR 20 | INR 20 |
| Investment Amount | INR 10,000 | INR 10,000 |
| Final NAV (31st March 2022) | INR 25 | INR 25 |
| Dividend Declared | INR 5 | – |
| Value Post-Dividend | INR 7,500 | INR 12,500 |
From the above illustration, the Growth plan leads to a higher NAV and investment value due to better compounding benefits. Both plans, despite having identical portfolios, differ in profit distribution or reinvestment strategies.
The IDCW is apt for regular income seekers, providing periodic payouts. In contrast, the Growth plan aligns with long-term compounding benefits, facilitating wealth generation over time.
Tax implications for IDCW and Growth plans vary. IDCW dividends classify as income, taxed per individual slabs, while Growth plan taxes apply on redemption with rates varying by the fund type and duration.
- For Equity Funds: Short-term gains (<1 year) taxed at 15%; long-term gains (>1 year) are 10% above INR 1 lakh.
- For Debt Funds: Short-term gains (<3 years) taxed per slab; long-term gains (>3 years) taxed at 20% with indexation.
From April 2023, all mutual fund capital gains will align with individual income tax slabs, affecting treatments, especially for debt funds.
Ultimately, when comparing IDCW vs Growth plans, investors should align their choice with their financial goals and consider potential tax effects.
Team Pluto
