Dividend vs Growth Mutual Funds: Which Option Should You Choose in 2025?

By Siddhi Jain | Sep 23, 2025, 18:22 IST

When investing in mutual funds, investors often face a key decision: whether to opt for the growth option or the dividend option, now officially termed as Income Distribution cum Capital Withdrawal (IDCW). Both options represent different investment strategies and can impact overall returns and financial planning in unique ways.

Growth Option: Harnessing the Power of Compounding

Under the growth option, any profit generated by the mutual fund is reinvested back into the scheme rather than being paid out. This reinvestment fuels the power of compounding, allowing both your principal and accumulated returns to grow over time.

NAV Growth: The Net Asset Value (NAV) of your fund rises as profits stay invested.
Best for Long-Term Goals: Growth plans are especially suited for investors with long-term financial goals like retirement planning, buying a home, or funding children’s higher education.
Tax Treatment: Investors are taxed only when they sell their units, making this option tax-efficient for long-term wealth creation.

Dividend (IDCW) Option: Regular Income with Trade-Offs

The dividend or IDCW option distributes a portion of the fund’s profits directly to investors at periodic intervals. While this provides liquidity, it also reduces the NAV of the fund since payouts are deducted from total assets.

Uncertain Payouts: The dividend amount is not fixed and depends on fund performance.
Ideal for Regular Income: This option suits retirees or individuals who prioritize monthly or quarterly income for day-to-day expenses.
Tax Implications: Dividends are taxed as ordinary income in the hands of investors, often leading to higher tax liability compared to growth funds.

Why SEBI Renamed Dividend to IDCW

The Securities and Exchange Board of India (SEBI) renamed the dividend option as IDCW to make it clearer to investors that payouts are not guaranteed and are derived from both profits and capital. This step was aimed at reducing misconceptions that mutual fund dividends offer assured returns like fixed deposits.

Choosing the Right Option in 2025

Your choice between growth and IDCW should align with your financial goals, investment horizon, and risk tolerance:

If your objective is wealth creation over the long term, the growth option is more suitable as it maximizes compounding benefits.
If you need regular cash flow, especially during retirement or to manage monthly expenses, the IDCW option may be the better fit.

Expert View

Financial advisors emphasize that neither option is inherently “better” than the other. Both have distinct advantages depending on an investor’s needs. For young professionals with time on their side, growth plans are ideal. For retirees or those seeking periodic income, IDCW provides a steady stream of payouts despite their variability.

Bottom Line

Mutual funds in 2025 continue to offer diverse choices, but understanding the difference between growth and IDCW options is crucial before investing. By aligning your choice with your personal financial goals and tax planning strategy, you can make smarter investment decisions that truly serve your long-term interests.