Decoding Growth, IDCW option of MFs
When investing in mutual funds, there are three options that are available in which you could invest: Growth, Income Distribution cum Capital Withdrawal (IDCW)-pay-out and IDCW re-investment. One is normally expected to select one of the three options when filling an investment form, however, in case if you do not fill any of the option, the fund house selects the default option for the scheme as mentioned in its Scheme Information Document (SID)/application form, which is most often the growth option. Investors have the flexibility to change the investment option at a later date to suit their convenience, based on the terms and conditions set out by the fund house.
Growth option: In this option, the scheme does not pay any dividend, but the amount gets accumulated. Therefore, nothing is received by you as a unit holder in the form of dividend and hence, nothing is reinvested in the scheme. The NAV of the scheme vary depending on the investments made by the scheme through its portfolio. The number of units with the investor remains the same, if no additional investments are made by the investor.
IDCW payout: In this option, the mutual fund scheme might pay you from the distributable surplus available with the scheme in the form of dividend. Generally fixed income schemes pay dividend at predefined frequency such as monthly, quarterly, half-yearly or yearly basis. Generally, depending on the distributable surplus a liquid fund provides for a daily or weekly dividend option. Equity oriented schemes generally declare dividend on an ad-hoc basis rather than declaring it at pre-defined frequency.
However, dividend distribution is never guaranteed as the same is subject to availability of distributable amount and at the discretion of the Trustees of the Fund. Also, consequent to payment of dividend, NAVs of the Income Distribution Cum Capital Withdrawal (IDCW) falls to the extent of divided amount and applicable taxes.
Dividend reinvestment: In this option, the dividend if any, is not paid to you, instead it is reinvested in the scheme itself by buying more units on your behalf at the applicable NAV.
As investors, the treatment of gains and taxes are the two essential features that differentiate these options. If evaluating the returns from an investment at a point of time, there is hardly any difference among the three options. The difference emerges in an implicit form with respect to the applicable taxes.
Hence, it is important to consider the tax impact when selecting between the growth, dividend payout or dividend reinvestment options as the post-tax returns' differs between the options. This difference occurs because the tax treatment is different for long-term and short-term holding period. The tax treatment also differs for equity and debt funds.
Consulting your investment advisor is the best way to take any investment decisions before investing to understand all legal, financial and taxation implications.
An Investor Education & Awareness Initiative by HSBC Mutual Fund
Visit https://grp.hsbc/KYC w.r.t. one-time Know Your Customer (KYC) process, complaints redressal process including SEBI SCORES (https://www.scores.gov.in). Investors should only deal with Registered Mutual Funds, to be verified on SEBI website under Intermediaries/Market Infrastructure Institutions (https://www.sebi.gov.in/intermediaries.html). Investors may refer to the section on ‘Investor Education’ on the website of HSBC Mutual Fund for the details on all ‘Investor Education and Awareness Initiatives’ undertaken by HSBC Mutual Fund.
This document is intended only for distribution in Indian jurisdiction. Neither this document nor the units of HSBC Mutual Fund have been registered under Securities law/Regulations in any foreign jurisdiction. The distribution of this document in certain jurisdictions may be unlawful or restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions. If any person chooses to access this document from a jurisdiction other than India, then such person do so at his/her own risk and HSBC and its group companies will not be liable for any breach of local law or regulation that such person commits as a result of doing so.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.