A Beginner’s Guide to Investing in Equity Mutual Funds - Part 2
- Shwealth
- 21 hours ago
- 3 min read
Updated: 14 minutes ago
In Part-2 of this 3 part series blog, I will cover the various schemes options available and what they mean for the investor.
When you invest in mutual funds in India, you not only pick the scheme but also choose how your returns are managed and how you pay for advice. These decisions — Growth or IDCW (Dividend) and Regular or Direct — directly affect your wealth creation, taxation, and costs.
Let’s break down these mutual fund options in simple terms.
Growth vs Dividend (IDCW) in Mutual Funds - Choosing this option determines, whether you all profits and dividends to be reinvested and hence increase your capital (growth option) or you would like to receive regular payouts (IDCW option)
GROWTH OPTION
All profits and dividends earned by the fund are reinvested.
The Net Asset Value (NAV) rises over time as returns compound.
You don’t receive payouts during the investment period.
Best for:
Long-term investors focusing on capital growth.
People in higher tax brackets who don’t need regular income.
Tax impact:
You pay tax only when you redeem units (as capital gains).
Encourages compounding over years.
IDCW (Dividend) OPTION
IDCW stands for Income Distribution cum Capital Withdrawal, the new SEBI term for “Dividend Option.”
The fund periodically pays out a portion of profits to investors.
NAV drops after each payout because part of your capital is distributed.
Useful for investors needing regular income.
Best for:
Retirees or conservative investors.
Those preferring consistent cash flow.
Tax impact:
IDCW payouts are taxed as income at your slab rate.
Regular vs Direct Mutual Fund Plans
This choice decides how you invest — through an advisor (regular plan) or on your own (direct plan).
DIRECT PLAN
You invest directly with the AMC (fund house) via its website or app.
No distributor commissions → lower expense ratio.
Over long periods, this cost saving can add up to 0.5%–1% extra annual return.
Ideal for:
DIY investors comfortable researching funds.
Long-term wealth builders minimizing costs.
REGULAR PLAN
You invest through a distributor, bank, or platform.
The AMC pays them a commission from your fund’s expense ratio.
NAV is slightly lower due to the extra cost.
You get professional advice and portfolio monitoring.
Ideal for:
Beginners who prefer guidance.
Investors valuing personal service.
Investors too busy for researching and investing themselves.
For equity mutual funds, typically regular funds have an additional expense ratio of 0.8-1% which is essentially the commission to the distributor. Now this may not seem to be a lot, but over the years this cost is significant. See the table below:
Amount in INR | Initial Investment | Value after 10 years | Value after 20 years |
Direct Fund - 13% Returns | 100,000 | 339,457 | 1,152,309 |
Regular Fund -12% returns | 100,000 | 310,585 | 964,629 |
In the example above, on an initial investment of INR 1 lakhs, over 10 years the difference in value is ~INR 28,000 in final corpus and over 20 years it is ~1,88,000 (almost a double of your initial investment is going as commission). Hence choose your plans wisely understanding the long term cost implication.
If you are planning to move from regular to direct funds, I already had written a blog on the things to consider while switching:
Combining the Options
Hence, while making the investment you will need to choose from the following four combinations:
1. Direct – Growth
2. Direct – IDCW
3. Regular – Growth
4. Regular - IDCW
Key Takeaways
Growth vs IDCW = how profits are distributed.
Direct vs Regular = how you invest and pay fees.
For most long-term investors, Direct–Growth is the most cost-efficient route.
Short-term or income-oriented investors may prefer IDCW options.
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