When the mutual funds earn profit, they are reinvested into the fund scheme instead of distributed among the investors. So, investors earn profits on the profits that are reinvested.
The NAV or Net Asset Value of growth funds are higher than IDCW/dividend mutual funds as the profits are reinvested Investors pay capital gains tax on growth funds when it is redeemed.
Which option to choose? To understand which option to choose, look at the following factors:
If your financial goal is to grow your wealth, the growth option is for you. As profits are reinvested, the investor benefits from the power of compounding. So, while the fund may be the same, the total returns from the growth option are higher. This makes the growth option ideal for growing a corpus of wealth; for example, you can use growth mutual funds to save for your retirement years. However, if you want regular income from your investments, the IDCW/dividend option is preferable. For example, if you are retired or don’t have a steady income.
For growth equity funds, STCG or short-term capital gains (i.e., capital gains for funds held for less than 12 months) are taxed at 15%. LTCG or long-term capital gains (i.e., capital gains for funds held over 12 months) are taxed at 10% if the gains are over Rs 1 lakh. Capital gains up to Rs 1 lakh per annum are considered tax-free.
For IDCW/dividend funds, equity and debt funds are taxed per the investor’s tax slab. If the investor does not have any other income source, a 10% mandatory TDS is deducted from the dividend income. However, no deduction occurs if the dividend is Rs 5,000 or lower.
The growth option works best if you remain invested for at least 3 – 5 years in the fund. This long-term horizon is ideal for wealth creation via compounding. However, for the option of IDCW, there is no requirement as such. Advisors suggest that the option of IDCW is best suited when the market is rising, as there is a greater likelihood of the fund being able to declare a significant amount of profits/dividends.
The main difference between the growth and dividend options is the profit payout keeping the aspect in mind. So, if you need income in your files and have the specific utility of the money paid out regularly, you can opt for the IDCW option. However, since the dividend payout is not guaranteed, the income as a dividend is also not fixed and can vary from time to time. So, if you do not need the regular income, you can opt for the growth option, and your financial portfolio grows. Thus, analyse your financial condition and requirements and make your choice accordingly.
0 people liked this article.