Introduction
Investing in mutual funds is all the rage these days. Whether it is advertisements on television, newspapers, or even social media, talk about investing in mutual funds is on an upswing. However, how do you know which one to choose? As a prudent investor, you must consider your income goals, risk tolerance, and investment goals as the primary criteria while evaluating mutual funds.
Income Distribution cum Capital Withdrawal (ICDW) and growth option mutual funds are the two types of popular mutual funds these days. Each comes with its benefits and considerations. However, choosing the right investment vehicle matters because it determines when and how you will receive your earnings from the chosen mutual fund. It also affects your income and taxes.
If you are wondering which options to choose, keep reading. This article introduces you to the meaning of growth options and IDCW mutual funds and their key differences. By using this information, you will know which one is the right investment option for you.
Growth Option in Mutual Funds
This type of mutual fund does not offer regular payouts. Any earnings from it, whether profit or dividend, are directly reinvested in the fund. In turn, it increases the total value of the units you hold. Growth option mutual funds leverage the power of compounding. Simply put, the longer you wait, the higher the capital appreciation, directly translating to higher returns. If you want a long-term investment option, consider growth option mutual funds.
IDCW in Mutual Funds
In the income distribution cum capital withdrawal (IDCW) mutual fund, you will receive regular payouts from the fund. As the name suggests, these payouts are essentially a part of the fund's profit, which is distributed to all the unit holders. This is ideal if you are looking for a regular income from your investment or have any short-term requirements. Unlike growth option mutual funds, the fund's total capital depreciates with time due to the lack of reinvestment. Instead of receiving a lump sum upon redemption, you will receive regular payouts.
IDCW vs. Growth Option in Mutual Funds: Key Differences
If you want a regular income, low-risk tolerance, and short-term investment goals, then the IDCW is the right choice. Since earnings from it are subject to taxation according to your personal taxation rate, you can reduce your overall liability, unlike the high capital gains tax.
On the other hand, if you are focused on long-term wealth creation, have a longer financial investment horizon, and have a high-risk tolerance, then go with growth options. These offer better tax benefits since tax payable can be deferred until the fund is redeemed.
So, the answer to which one is better depends on your personal investment objectives, such as income expectation, risk tolerance, investment horizon, and taxation rates.
Conclusion
Whether it is a growth option or IDCW in mutual funds, both have unique features and advantages. Depending on your investment goals, income expectation, investment horizon, and risk tolerance, you can choose one of them. However, before making any investment decisions, research the instrument and carefully consider your financial goals for sound decision-making.
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