Explained: How to switch from dividend to growth option in mutual funds

At the time of investing in mutual funds, each scheme requires you to choose between two options— ‘growth’ and ‘IDCW’ (income distribution cum capital withdrawal). Many investors end up making a random selection as they do not understand the implication of opting for either.

Many investors begin their mutual fund journey by choosing the dividend option. Over time, they often realise they would prefer to let their money stay invested and grow rather than receive payouts. However, many continue with the dividend option simply because they are unaware of how to switch to the growth option.

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For new investors, mutual fund schemes provide three choices at the time of investment: growth, dividend, and dividend reinvestment.

In a mutual fund’s growth option, the profits earned are reinvested into the fund. This means your investment keeps earning on itself over time, helping the total amount grow bigger. As the fund adds these earnings, its net asset value (NAV) goes up, which is why it’s called the ‘growth’ option.

IDCW option

In the IDCW option, part of the fund’s profits or gains is paid out to investors instead of being reinvested. These payouts aren’t guaranteed and reduce the fund’s NAV, limiting long-term growth. SEBI introduced IDCW to clarify that the payments come from the investor’s own capital and earnings.

Growth option

In a mutual fund’s growth option, the profits earned are reinvested into the fund. This means your investment keeps earning on itself over time, helping the total amount grow bigger. As the fund adds these earnings, its net asset value (NAV) goes up, which is why it’s called the ‘growth’ option.

How do you switch?

If you are switching from the dividend option to the growth one, you just have to fill up a form and the procedure normally takes 24 hours to complete. On the other hand, if you are switching from dividend reinvestment option to dividend payout option, the process is a little different. You need to submit a written application to the fund house and the process could take a couple of days.

However, switching from dividend to growth plan or from growth to dividend would be taken as redemption from the existing scheme and fresh purchase in the new plan because both plans have different Net Asset Values (NAVs).

The switch would also attract exit load (if applicable) and the taxation would be based on the holding period.

The Mutual Funds Sahi Hai website shares this with an example which says that, “Imagine you’ve booked an 8 am flight from Bengaluru to Chennai on FlyIndia Airlines. You realise that the wrong flight was booked and needs rescheduling. What kind of charges do you think FlyIndia will charge you? You will have to pay a penalty for changing your mind even though it is the same airline, same date of travel, same destination and the same passenger!”

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This means you should first check if switching will attract an exit load. If waiting a few weeks or a couple of months can help you avoid the charge, it may be wiser to postpone the switch until then.

“In the case of Mutual Fund investments,switching your investments from one option to another within the same scheme is considered as a sale (redemption). Hence, the switch will attract exit load and capital gains tax depending on how long you had invested,” the Mutual Funds Sahi Hai Website said.

NAV - In case of growth option, the NAV increases over long periods whereas in case of IDCW option, it is reduced or remains static. Dividend is already distributed.

Who should opt? - Those who are looking for long term capital growth should consider the growth option whereas those looking for periodic income should choose the IDCW option.