Funds make money in three ways. The holdings rise in price, which lifts the NAV. The holdings pay income, dividends from shares or interest from bonds, which is reinvested or paid out. And the manager sells holdings for more than they were bought, realising a gain.
In a growth plan all of this stays inside the fund and shows up as a higher NAV. In an IDCW plan some of it is paid out to you periodically, and the NAV drops by the amount paid. Neither creates extra money; they only decide whether the return stays invested or reaches your bank.
Returns are not steady. Equity funds can gain 30 percent one year and lose 15 the next. Debt funds move far less but are not immune to interest rate changes. The number you should care about is the average over the whole period you plan to hold, not any single year.
Growth plans keep your return working. Income plans hand it back to you.
- What is NAV?
- Where Does Your Money Go?
- Who Manages Your Money?
- What is an Expense Ratio?
- How Do Mutual Funds Generate Returns?
- Understanding Risk vs Reward