When you invest in a mutual fund scheme, you will typically be asked to choose between two options: the Growth option and the IDCW option. This choice determines how the profits generated by the fund are treated and can have a significant impact on your long-term wealth creation.
The Growth Option: The Power of Reinvestment
In the Growth option, the mutual fund does not distribute any of its profits to the investors. Any gains made by the fund—whether through dividends received from the stocks it holds or through capital appreciation from selling stocks at a profit—are automatically reinvested back into the scheme.
This reinvestment buys more shares or bonds for the fund's portfolio, causing the Net Asset Value (NAV) of your units to grow over time. The Growth option is designed to maximize the power of compounding. By continuously reinvesting the earnings, your investment base grows larger, and subsequent returns are generated on this larger base, which can make the investment grow faster over the long term when returns are positive.
The IDCW Option: A Regular Payout
The IDCW option, which stands for Income Distribution cum Capital Withdrawal, periodically pays out a portion of the fund's realized profits to the unitholders. These payouts can be monthly, quarterly, or annual, depending on the scheme.
It is critically important to understand what an IDCW payout is. It is not an extra return or a bonus. When a fund pays an IDCW, the amount of the payout is deducted from the scheme's NAV. For example, if a fund's NAV is ₹50 and it declares an IDCW of ₹2 per unit, the NAV will fall to ₹48 immediately after the payout. The IDCW is simply a return of a part of your own invested capital and its appreciation.
SEBI mandated the name change from the earlier "Dividend Option" to "IDCW" precisely to clear up this confusion. Many investors mistakenly believed that mutual fund dividends were like company stock dividends—an extra profit paid out by the company. The new name accurately reflects that the payout is a withdrawal of capital from the scheme.
Which Option Should a Beginner Choose?
The choice depends entirely on your financial goal:
For Wealth Creation: If your goal is to build a large corpus over the long term for goals like retirement or a child's education, the Growth option is generally better suited. It keeps all gains invested so they can compound, although the value still rises and falls with the market.
For Regular Income: The IDCW option is suitable only for investors who need a regular cash flow from their investments, such as retirees who use it to cover their monthly expenses.
For any investor in the accumulation phase of their life, especially a young professional, the default choice should always be the Growth option. Opting for the IDCW option during your earning years is like periodically taking water out of a bucket you are trying to fill—it slows down your progress and significantly reduces your potential long-term wealth.