Investing in Mutual Funds: Growth Versus Income Distribution and Capital Withdrawal Plans

There are different types of mutual funds to meet the requirements of various investors. While zeroing in on a mutual fund scheme, an investor needs to consider two critical parameters to sustainability: a growth plan and an income distribution cum capital withdrawal (IDCW) plan.

Here’s the lowdown on key differences between the growth plan and the IDCW plan.

The profits earned in the income distribution cum withdrawal (IDCW) plan are distributed to investors. On the other hand, the profits earned by the growth fund are ploughed back to invest in the scheme.

Dividends are paid to the investors of IDCW from the fund’s net asset value (NAV), which witnesses a dip. Generally, growth plans have a high NAV value, which tends to rise as the profits are reinvested. Besides, it also offers the advantage of the compounding effect.

The total returns earned in the IDCW plan are lower than the growth plan due to the dividend pay-out periodically, which could be quarterly or annually.

Tax in the IDCW plan is required to be paid if an investor falls within the tax-slab bracket. Growth plans investors are liable to pay a 10% tax for short-term capital gains (STCGs) if the investment is sold within a year and a 15% tax on long-term capital gains (LTCGs) is paid when the investment is sold after a year.

An investor should select a plan considering individual financial goals, investment horizon, and tax slab. Ideally, investors looking for regular income can invest in an IDCW plan while those aiming to grow their wealth can opt for a growth plan.