When investing in mutual funds, one common question every investor faces is:
Should I choose the Growth option or the Dividend (also called Income Distribution with Capital Withdrawal - IDCW) option?
Understanding the difference between these two can significantly impact your wealth creation journey.
In this article, we'll break down the Growth vs Dividend options, their features, tax implications, and how to choose the best one for your financial goals.
What is the Growth Option in Mutual Funds?
In the Growth option, the profits made by the mutual fund are reinvested back into the scheme instead of being paid out. Over time, this helps the fund’s NAV (Net Asset Value) grow faster due to the power of compounding.
Key Features:
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No interim payouts.
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NAV increases as profits accumulate.
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Ideal for long-term wealth creation.
Example:
If you invest ₹1,00,000 in a mutual fund and it earns 12% annually, your fund value becomes ₹1,12,000. In the Growth option, this ₹12,000 is reinvested, so next year you earn returns on ₹1,12,000 — not just your original amount.
What is the Dividend (IDCW) Option?
In the Dividend option, the mutual fund distributes a portion of its profits to you at regular intervals (monthly, quarterly, or annually), depending on availability of distributable surplus.
Key Features:
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You receive income from the fund.
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NAV decreases whenever a dividend is paid.
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Good for those seeking periodic cash flow.
Example:
If your fund declares a dividend of ₹5 per unit and you hold 100 units, you get ₹500 as a payout. But the NAV drops by ₹5 after the dividend is paid.
Growth vs Dividend: Quick Comparison
| Feature | Growth Option | Dividend (IDCW) Option |
|---|---|---|
| Returns | Reinvested | Paid out periodically |
| Compounding | Full benefit | Limited due to payouts |
| NAV | Higher over time | Adjusts after payouts |
| Best For | Long-term investors | Regular income seekers |
| Taxation | LTCG or STCG tax | Taxed as per slab (from April 2020) |
Tax Implications (As of FY 2025)
Understanding tax differences is critical:
Growth Option:
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Equity Funds (held > 1 year): 10% LTCG tax after ₹1 lakh exemption.
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Debt Funds (held > 3 years): 20% with indexation (for old investments); flat slab rates for new ones (post April 2023).
Dividend (IDCW) Option:
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Since April 2020, dividends are taxed in the hands of the investor.
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Taxed as per your income slab, which could mean up to 30% tax + cess.
Insight:
For those in higher tax slabs, the dividend option may result in higher tax outgo compared to capital gains in the growth option.
When Should You Choose Growth Option?
Choose Growth Option if:
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You want to build wealth over the long term.
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You don't need regular income from your investment.
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You're in a higher income tax bracket.
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You understand the power of compounding.
When Should You Choose Dividend (IDCW) Option?
Choose Dividend (IDCW) Option if:
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You need regular income — e.g., retirees or those without a steady paycheck.
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You are in a lower income tax bracket.
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You're investing in debt funds for short-term goals and want income flow.
Real-World Example:
Let’s say both options give 12% annual returns.
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With Growth, ₹1 lakh becomes ₹3.1 lakhs in 10 years (compounded).
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With Dividend, you may get regular payouts but your corpus may not grow as much due to reduced compounding.
Verdict:
The Growth option generally suits most investors aiming for long-term goals like retirement, children’s education, or wealth creation. The Dividend option is ideal for income needs, but with careful tax planning.
Final Thoughts
Choosing between Growth and Dividend is not just about returns — it's about your goals, tax situation, and income needs.
If you're a long-term investor with no immediate cash flow requirements, the Growth option is usually better. But if you need regular payouts and are in a lower tax bracket, the Dividend option might work for you.
💬 Still unsure? Consult with a certified mutual fund distributor or financial planner to make the right decision.
Bonus Tip:
You can switch between Growth and Dividend options within the same mutual fund scheme. However, it’s considered a redemption and a new investment — so taxes may apply.