This is a common point of confusion for new investors when they begin their mutual fund investment journey. They often wonder whether they should choose the Growth option or IDCW (Income Distribution cum Capital Withdrawal), formerly known as the dividend payout option. However, the decision is not complicated once you understand how both options work.
In my opinion, the right choice depends entirely on your financial goals, age, and future plans. For example, if you are young, earning well, and have a stable source of income, you should generally choose the Growth option instead of IDCW. This is because IDCW distributions may increase your taxable income and can reduce the long term growth potential of your investment. Since you already have a regular income, you may not need additional periodic payouts from your mutual fund.
Now consider the opposite situation. If you are older and struggling to manage your living expenses, the IDCW option may be suitable. If you have built a sizeable mutual fund portfolio, IDCW can provide a regular source of income. Once the amount is credited to your bank account, you can either use it for your daily expenses or reinvest it elsewhere. The choice depends entirely on your financial needs and goals.
Drawbacks of IDCW
Tax Disadvantage
Dividend distributions received under IDCW are taxable according to the applicable income tax rules. Even if you decide to reinvest the amount, the distribution is still considered taxable income. You must pay tax on the income based on your applicable tax slab, regardless of whether you spend or reinvest the money.
In certain cases, Tax Deducted at Source (TDS) may also apply before the amount is credited to your bank account, reducing the amount you actually receive. For investors focused on long term wealth creation, the Growth option is generally the better choice.
Tax Benefits of the Growth Option
If you choose the Growth option instead of IDCW, you generally do not pay tax while simply holding your mutual fund because no income is distributed during the investment period. Tax becomes applicable only when you redeem your units. At that time, the gains are taxed as either Long Term Capital Gains (LTCG) or Short Term Capital Gains (STCG), depending on your holding period and the prevailing tax rules.
IDCW vs Growth: Which Option Should You Choose?
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Choose the Growth option if you have a regular source of income, such as a salary or business income, and do not rely on mutual fund distributions to meet your daily expenses.
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Choose IDCW if you do not have a regular source of income and want periodic distributions from your mutual fund portfolio to help manage your living expenses.
