So, which investment option is better? While growth is clearly the better choice, IDCW suits a certain class of investors who want steady cash flows. They can do so by encashing their profits on a regular basis. Here is a primer on how the growth option stacks up against dividend payouts (IDCW) in equity MFs.
Which is a better investment option for average investors? Growth or Dividend?
If you are a long-term investor, then growth is the better choice. But if you need regular cash flows from your investment, dividend (IDCW) is a good bet. “For most investors, growth is the better option. In the growth option, all profits stay invested in the fund, compounding over time. It is the single most powerful feature of long-term equity investing, letting your money work without any interruptions,” said Rohan Goyal, Investment Research Analyst, MIRA Money, a technology-based investment management platform. “Investors seeking long-term wealth creation typically prefer the growth option,” said Aditya Agrawal, Chief Investment Officer, Avisa Wealth Creators, a wealth management platform.
“Choose growth if you are building long-term wealth, if you don’t need regular income from your investments and if you want the full power of compounding to work,” Goyal said. “Choose dividend if need periodic cash flows and if you are using it as a disciplined spending mechanism and not as a wealth creation tool,” he said.
What happens to the NAV (Net Asset Value)?
The clearest difference in the growth and dividend options gets reflected in the NAV of the respective funds. The NAV of a dividend fund (IDCW) will always be lower than the growth fund as profits will be regularly distributed in the form of dividends to unitholders.
“The dividend option (in equity MFs), does not pay you any ‘extra money’. They simply remove a portion from your NAV and give it back to you. Your wealth does not grow and is redistributed to you. The NAV declines by the exact amount that is paid back to you,” Goyal said.
“In IDCW plans, periodic payouts reduce the NAV, which often results in lower total value compared with the growth option of the same fund,” Agrawal said. For instance, the NAV of HSBC Multicap Fund (Growth) is ₹18.74 while the dividend (IDCW) option has an NAV of ₹15.48, Motilal Oswal Large and Mid-Cap Fund (Growth) has an NAV of ₹38.03 while the IDCW option NAV is ₹26.88, Bank of India Flexicap (Growth) has an NAV of ₹39.8 while the IDCW scheme has an NAV of ₹33 (all NAVs as on April 21, 2026).
“The gap continues to widen over longer periods and the IDCW option will always underperform the growth option. This is not because of poor management, but because of capital withdrawal and compounding,” Goyal said.
Who can choose the growth option?
The growth option is highly recommended for young investors, say experts. This is because they have time on their side. “A young investor’s greatest strength is time. Compounding will work exponentially and every rupee pulled out is a rupee that loses decades of compounding,” Goyal stated.
“Dividend (IDCW) is usually not ideal for younger investors, as they generally have a longer investment horizon and do not require regular income. Younger investors benefit more from the compounding potential of the growth option, which can significantly enhance wealth over time,” Agrawal said.
“Younger investors also typically don’t need income from their portfolio. They have salaries for that. Choosing IDCW at age 25 is one of the least optimal financial decisions an investor can make,” Goyal said. A sum of ₹1 lakh invested in a fund that delivers a CAGR (Compounded Annual Growth Rate) of 12% over 25 years grows to nearly ₹17 lakh whereas the same investment under IDCW would accumulate significantly lower amount, he said.
What are the tax implications of investing in growth and dividend schemes? Which option is more tax efficient?
The growth option is more tax efficient compared to dividend payouts, say experts. “In the growth option, investors pay tax only when they redeem units, usually as capital gains, allowing gains to compound tax-efficiently. In IDCW schemes, dividends are taxed at the investor’s applicable income tax slab, making them generally less tax efficient, especially for investors in higher tax brackets,” Agrawal said.
Here is how both the variants are taxed
Growth Option
Short-Term Capital Gains (STCG): If redeemed within 1 year – taxed at 20%
Long-Term Capital Gains (LTCG): If held beyond 1 year – taxed at 12.5%, with gains up to ₹1.25 lakh per year exempted from tax
The key advantage with the growth option is that you have the flexibility over when to redeem providing you a full control over your tax liability.
IDCW (Dividend) Option
Dividends are added to your total income and taxed at your income tax slab rate. For investors in the 30% tax bracket, every dividend payout is taxed at 30%, which is more than double the LTCG rate. You have no control over the timing and the AMC (Asset Management Company) decides when to declare dividends whether you need the money or not.
