What is the growth option in mutual funds?
The growth option in mutual funds is an investment strategy where the investor does not receive any Income Distribution cum Capital Withdrawal from the mutual fund’s units. Instead, the money is reinvested back in the fund. It is important to note here that the investor does not receive more units with the growth option, but the NAV of the fund increases.
Since the money earned is reinvested until the maturity or redemption of the mutual fund in the growth option, the extended investment period harnesses the power of compounding to potentially create more wealth for the investor.
Growth option vs IDCW option vs IDCW reinvestment: Which one is better?
Investors can choose three options when they invest in any mutual fund: growth option, IDCW option, sub option for IDCW, i.e., IDCW reinvestment option.
On their own, neither the growth option nor the IDCW option is better or worse than the other. While the mutual fund growth option offers potentially reasonable returns in the long run, the IDCW option offers a regular inflow of funds, subject to availability of surplus funds. The suitability of both investment options depends on the needs and financial goals of the investors.
- In the mutual fund growth option, the investor does not get any IDCWs from the mutual fund’s schemes and the mutual fund reinvests them back into the fund. This raises the Net Asset Value (NAV) of the mutual fund.
- On the other side is the IDCW option where regular IDCWs, determined by the fund manager, are paid to the investor generating a potentially steady inflow of funds, subject to available surplus in the fund.
Who should choose growth option?
The following investors can choose the growth option in mutual funds:
Desire to create wealth: The appreciation re-invested into the fund also generate profits and the money potentially keeps growing with each re-investment. This enhances the effect of compounding to create relatively more wealth.
No need for a regular inflow of funds: The growth option works for investors who are not looking to create a stream of income with their mutual fund investment. For investors who want to have regular inflow of funds from their assets, the IDCW option is more suitable.
Longer investment horizon: Investors who choose the growth option have the chance to generate potentially higher returns in the long term, thanks to the power of compounding.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.