Investor Corner/The asset classes/Mutual Fund Core Concepts
2.3.5 Growth vs IDCW (Dividend) Option
Growth option keeps all returns inside the fund, increasing its NAV over time. IDCW pays out returns periodically, reducing NAV each time. For most long-term investors, Growth is generally the more tax-efficient choice.
Two ways the same fund can pay you
Under the Growth option, any profit the fund makes stays invested and is reflected in a rising NAV. Under the IDCW option, formerly called the Dividend option, the fund periodically pays out a portion of its gains directly to unit holders, and the NAV drops by roughly that payout amount immediately afterward.
Why the payout is not extra money
An IDCW payout can feel like a bonus, but it is simply your own money being returned to you from the fund's own NAV, not a gain created out of nothing. The NAV falls by approximately the amount paid out, so total wealth, payout plus remaining NAV, is not fundamentally different from what Growth would have delivered before considering tax.
Why Growth usually wins on tax
IDCW payouts are generally taxable in the year they are received, whether or not the investor actually needed the cash at that time. Growth option, by contrast, generally defers tax until units are actually redeemed, letting the investor control the timing of any tax event. For most investors not relying on regular payouts for income, Growth is the more tax-efficient default, with a Systematic Withdrawal Plan available as a more controlled alternative for anyone who does need regular cash flow.
How PriLytics helps. PriLytics tracks NAV, invested amount and gain for every fund regardless of which option you hold, and computes realised gains by financial year for accurate tax planning. See capital gains and tax.