Growth or IDCW: why the payout option's returns look so much worse
The IDCW option's NAV has had money taken out of it. Any return computed from NAV alone will understate it — sometimes by eight percentage points a year.
Next to Direct and Regular, a fund offers a second choice: Growth or IDCW — Income Distribution cum Capital Withdrawal, which used to be called the dividend option.
What each one does
Growth keeps everything inside the fund. The fund earns, the NAV rises, nothing is paid out. You see the return only when you sell.
IDCW pays money out to you from time to time. When it does, the fund is smaller by exactly that amount, so the NAV drops by the amount paid. That is not a loss. The money moved from the fund to your bank account, and the NAV records it leaving.
The trap in the returns
Here is where it goes wrong, and it goes wrong on a great many websites.
A return computed from NAV alone asks: what was the NAV then, what is it now? For a Growth plan that question is complete — nothing left the fund, so the NAV carries the whole story.
For an IDCW plan the same question is missing every rupee that was paid out. Every payout pushed the NAV down, and a NAV-only calculation reads those drops as the fund doing badly.
How large is the error? On the same fund, same portfolio, same manager, the gap between the two options' NAV-based ten-year figures can be several percentage points a year. The Growth plan might read 10% and the IDCW plan 3.5% — for a portfolio that performed identically, because it is the same portfolio.
The IDCW investor did not earn 3.5%. They earned roughly what the Growth investor earned; they just took part of it in cash along the way. The number is wrong, not the fund.
What this means when you read any fund table
If a table shows Growth and IDCW options of the same fund next to each other with different returns, and does not say that the IDCW figure excludes payouts, that table is comparing two things that cannot be compared.
It is why the returns on this site are computed on the Growth option, and why a fund page says so on its face rather than in a footnote.
So which option changes what?
The option does not change what the fund owns or how it performs. It changes three things:
- When you get the money. IDCW gives you some of it as it goes. Growth gives you all of it when you sell.
- When you are taxed. An IDCW payout is taxed as income in the year you receive it, at your slab rate. A Growth plan is taxed only when you sell, as capital gains.
- What compounds. Money paid out to you is no longer inside the fund earning. That is the whole difference in the long run.
Which suits you depends on whether you need the income now and what your tax slab is. That is a question about your situation, not about the fund, and we are not the right people to answer it.
Reading it properly
On any fund page here, the plan and option switcher at the top moves between all four versions of the same fund, and the page says which one's NAV each number was computed from. The comparison tool holds the option fixed across funds, so you are never reading one fund's Growth against another's payout plan.
Analysis, not advice. Tax treatment depends on your own circumstances and changes with the law; check it with somebody qualified to advise on it.