The popular belief with regards to mutual funds is that investors invest a certain amount of money every month for the next 2 or 3 decades. The investor will enjoy the benefits of compounding after decades, and there is no steady monthly income generated.
But it is not known to a large number of investors that there is an option for a type of mutual fund that not only provides monthly income but also gives you the benefit of appreciation of the principal amount.
Investors who invest in mutual funds have access to a variety of options, including growth, payout, and reinvestment of income distribution and cum-capital withdrawal options. Every one of these alternatives has advantages and disadvantages of its own.
A 'Mutual Fund' has three different types of investments: growth, IDCW (income distribution-cum-capital withdrawal), and IDCW (reinvestment).
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1)Growth Option
The growth option allows for reinvested profits from the investment portfolio to be reinvested back into the mutual fund scheme. As a result, the fund's NAV increases as a result of the retained and reinvested profits. Therefore, the increase in the mutual fund schemes' net asset values (NAV) can be used to gauge the growth option's returns.
2) IDCW (income distribution-cum-capital withdrawal)
If an investor invests in IDCW, the mutual funds may pay income to unitholders in accordance with the fund's realized profits. As a result, investors can gauge their returns by looking at the income they receive and the capital growth represented by the fund's NAV (Net Asset Value).
These cash flows, however, might not be recurring income because the payout depends on a number of variables, such as realized profits, available distributable surplus, etc.
But if the investor needs regular payouts from their mutual fund investments, Investor can opt for a 'Systematic Withdrawal Plan' (SWP). The investments are redeemed under SWP at regular intervals, providing the investor with consistent cash flows.
3) IDCW (reinvestment)
The mutual fund reinvests its distribution of income back into the program. New mutual fund units are acquired using the IDCW (Reinvestment) amount at the current NAV.
Investors can therefore assess their returns by contrasting the increase in NAV with the weighted average cost of the mutual fund units, regardless of whether the units were purchased through an initial investment or through the reinvestment of "Income Distribution-cum-Capital Withdrawal."
Since the income and profits from mutual fund schemes are reinvested in the fund itself, the growth and IDCW (reinvestment) options may appear to be identical from an optical standpoint.
Mutual funds are being preferred
Mutual funds are quickly rising to the top of the investment instrument list. Because of the country's growth prospects, rising financial literacy rates, and the support of digitalization, the most important thing to remember is that choosing the appropriate funds will ensure that your investment works for you.
(Mutual Fund investments are subject to market risks, read all scheme related documents carefully.)
