Mutual Funds: Growth vs IDCW Know the Difference

If you are keen on investing in mutual funds, you need to understand some of its basics. Mutual funds are a pool of professionally managed funds where the fund manager is supposed to buy/sell securities in accordance with the scheme’s investment goal. What fund houses do is that they collect money from investors sharing common investment objectives and invest this pool of funds across the Indian economy. The money is distributed across multiple asset classes like equity, debt, corporate bonds, government securities, call money, certificate of deposits, etc.

Mutual fund investors are allotted mutual fund units depending on the investment amount and the fund’s existing net asset value (NAV). The performance of a mutual fund may depend on the performance of its underlying assets. Mutual funds are supposed to carry a diversified portfolio. Because these funds invest in different asset classes, they do not just offer diversification, but also help investors with risk management. Because if one of the asset classes in which the mutual fund invested collapses, it is less likely for all the other asset classes to collapse at the same time in tandem. In fact, the other asset classes may be able to even out the losses that the fund is bearing through that one sector.

SEBI, the regulator of mutual funds in India, describes them as, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors, and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.”

Regular and Direct plan in mutual funds

If you are planning to invest in mutual funds, you should be aware of the fact that they offer two plans – regular plan and direct plan. A direct mutual fund plan is typically a mutual fund scheme offered directly by the fund house / Asset Management Company. In a direct mutual fund plan, there are no third party involvements and hence the fund house doesn’t need to pay and distribute or commission fees. To purchase a regular plan, an investor doesn’t have to visit the fund house personally. They can do the same by buying a regular mutual fund plan through intermediaries like distributors, advisors, or brokers. However, the fund house has to pay a commission to the third party through which the funds are being bought by investors. The fund house adjusts the commission fees by charging a higher expense ratio on regular mutual funds. .

IDCW vs Growth Option

Just like you have two plans to choose from while investing in mutual funds, investors have two different investment options in the form of growth and IDCW. In the growth option, if the mutual fund you invested in manages to make any profits, these profits are invested back into the scheme. Over time, this may (or may not) result in the increase in the net asset value of the scheme. The growth payout option in mutual funds is generally benefited by those who have a long term investment horizon and wish to remain invested for the long run.

On the other hand, the IDCW payout option is more suitable for anyone who is investing in mutual funds to receive regular income. That’s because in the IDCW payout option, the profits made by the fund aren’t reinvested back in the scheme. Instead, investors receive income in the form of IDCW from time to time. These IDCW that the fund manager rolls out are from the fund’s NAV. The profits made by the scheme are distributed in the form of IDCW to the investor. However, it is up to the fund manager when to roll out these IDCW

So that’s IDCW and growth for you. If you are planning on investing in mutual funds, are you planning to go with the growth option or IDCW option? No matter what you choose, make sure that it aligns with your investment objective. You can easily compare both options and track your investments through the MF investment app.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.