What is IDCW in mutual funds?

Investing in mutual funds is a popular way to grow your wealth over time. However, what may not always seem easy is the set of terms and options assigned to these mutual funds. One such term that you might commonly come across is IDCW in mutual funds.

Let’s take a closer look at what IDCW means, how it works, and why it's important for you as an investor.

• Table of contents

1. What is IDCW in mutual funds?
2. How does income distribution cum capital withdrawal work?
3. Types of IDCW in mutual funds in India
4. What's the mandate by SEBI for dividend schemes?
5. The reason behind SEBI's renaming of dividend plans
6. Benefits of Income Distribution cum Capital Withdrawal
7. Is there any difference between dividends declared by mutual funds and companies?
8. Things investors should know before choosing the IDCW plan

What is IDCW in mutual funds?

Let’s begin by understanding the meaning of IDCW. IDCW stands for Income Distribution cum Capital Withdrawal. It is a feature in mutual funds where the fund distributes income to investors from its profits. This is similar to how companies pay dividends to their shareholders. However, unlike dividends from companies, IDCW payments can also include a portion of the capital invested by the investors. This means that the payouts are not solely from the profits made by the mutual fund but can also involve returning part of the investor's original investment. This makes IDCW a unique feature in mutual funds, offering both income and capital return to investors. Please note that the IDCW payout is subject to the availability of distributable surplus as computed in accordance with SEBI Regulations.

How does income distribution cum capital withdrawal work?

When you invest in a mutual fund with IDCW, the fund manager distributes the income generated by the fund to its investors. This income can come from dividends, interest, or the sale of securities held by the fund. The distributed income can be received in two ways:

• Cash payout: You get the income directly into your bank account.
• Reinvestment: The income is reinvested back into the fund, buying more units for you.

Types of IDCW in mutual funds in India

After understanding what IDCW is, it’s essential to know the different types of IDCW options available. These options give investors flexibility in how they receive their income from the mutual fund:

• IDCW payout: In this option, the income generated by the mutual fund is distributed to you as cash. This means you will receive the IDCW amount directly into your bank account. This is suitable for investors who are looking for regular income to meet their expenses.
• IDCW reinvestment: Instead of receiving the IDCW amount as cash, the income is reinvested to buy more units of the mutual fund. This can help in compounding your investments over time, as the reinvested units can potentially grow and earn returns in the future. This option is beneficial for those looking to increase their investment in the fund without actively adding more money.

Each type of IDCW serves different investor needs, from providing immediate income to facilitating growth through reinvestment, and offering regular distributions for better financial management. Understanding these options can help you choose the one that aligns with your financial goals.

What's the mandate by SEBI for dividend schemes?

In 2020, SEBI (Securities and Exchange Board of India ) issued a new mandate for mutual fund dividend schemes, to be implemented in 2021. Mutual fund houses were required to use the term IDCW instead of ‘dividend’ for their schemes. This change aims to clarify that these payouts are not just from the income/dividends on investments but can also include a return of your invested capital.

Reason behind SEBI's renaming of dividend plans

SEBI decided to rename dividend plans to IDCW to avoid confusion among investors. Earlier, many investors assumed that dividends paid by mutual funds were similar to those paid by companies, which isn't always the case. The new name, IDCW, makes it clear that these distributions can include both income and capital withdrawal.

Benefits of Income Distribution cum Capital Withdrawal

Now, let’s explore the benefits of IDCW in mutual funds. Understanding these advantages can help you decide if IDCW is the right option for your investment needs:

• Income: IDCW can provide a steady stream of income, which is particularly useful for retirees or individuals seeking regular cash flow to meet their day-to-day expenses. By opting for IDCW payout, investors receive periodic payments, helping them maintain a consistent income source without having to sell their investments.
• Flexibility:One of the key benefits of IDCW is the flexibility it offers. Investors can choose to receive the income as cash or reinvest it to buy more units of the mutual fund . This flexibility allows investors to design their investment strategy according to their financial goals. For instance, if immediate cash flow is needed, the IDCW payout option can be chosen, whereas for long-term growth, the reinvestment option may be more suitable.

Additionally, IDCW can help in diversifying an investor’s income sources, reducing dependence on a single income stream. This can be particularly beneficial in managing financial risk and ensuring a stable financial future. By providing both income and the potential for reinvestment, IDCW options cater to a wide range of investment strategies and financial goals.

Is there any difference between dividends declared by mutual funds and companies?

Yes, there is a significant difference between dividends declared by companies and those distributed through IDCW by mutual funds. Let’s understand these differences more closely to help you make an informed investment decision:

• Source of payment: Dividends declared by companies are usually paid out of their profits. When a company makes a profit, a portion of these earnings is distributed to shareholders as dividends. This payment is a reward for the shareholders' investment and is solely based on the company's profit performance.
• Composition of IDCW: On the other hand, mutual fund IDCW can include both the income generated by the fund and a portion of the investor's original investment. The income portion may come from dividends received from the fund's underlying investments, interest income, or capital gains from the sale of securities. Additionally, if the fund does not have sufficient income, it can return part of the investor’s original investment. This combination of income and capital return is why it’s called Income Distribution cum Capital Withdrawal.
• Implications for investors: This difference means that IDCW payments may not always represent pure profit like company dividends do. Investors need to be aware that receiving IDCW might reduce the capital they have invested in the mutual fund. This is particularly important for those who rely on mutual fund investments for long-term growth, as frequent IDCW payouts might affect the fund’s ability to grow over time.

Understanding these differences helps investors choose the right type of investment for their financial goals. While company dividends provide a share of profits, IDCW offers a more flexible option, combining income and capital withdrawal to suit diverse investment needs.

Things investors should know before choosing IDCW

Before opting for an Income Distribution Cum Capital Withdrawal (IDCW) plan, investors should consider the following key factors:

Impact on investment value: Each IDCW payout reduces the Net Asset Value of the investment value because the distributable surplus that would otherwise stay invested is redeemed and credited to the investor Impact on growth potential: The IDCW payouts reduce the invested base and can lower long-term growth potential.

Tax Implications:The income released as IDCW is added to the investor’s income tax and taxed as per the prevailing tax slab. Additionally, TDS of 10% is levied on IDCW income exceeding Rs. 5,000 in a financial year.

Goals:IDCW plans can be suitable for investors who need income from their investments, such as retirees. However, may not be suitable for investors who are primarily looking to potentially build wealth over time and don’t need income until a later date.

Conclusion

Understanding IDCW in mutual funds can help you make better investment decisions. In simple terms, this is a way for mutual funds to distribute income to investors, providing flexibility and potential tax benefits. Always consider your financial goals and consult with a financial advisor to decide if IDCW options are right for you.

FAQs

What does mutual funds IDCW mean?

IDCW stands for Income Distribution cum Capital Withdrawal. It means the mutual fund distributes income to investors from its profits, which can include a return of capital.

What is better, growth or IDCW?

It depends on your financial goals. Growth options reinvest earnings to increase fund value, while IDCW provides regular income. Choose based on your need for income or capital appreciation.

What is IDCW reinvestment?

IDCW reinvestment means the income distributed by the mutual fund is used to buy more units of the fund instead of being paid out as cash.

What are some misconceptions about mutual fund dividends in India?

Many investors think mutual fund dividends are like company dividends, paid only from profits. However, mutual fund dividends (now IDCW) can include a return of the investor’s capital, not just income generated by the fund.

Is IDCW subject to taxation?

Yes, IDCW is subject to taxation. The released amount per annum is taxed as per the investor’s prevailing tax slab. Additionally, a 10% TDS is applicable if the received income exceeds Rs. 5,000 in a financial year.

Which is preferable, Growth or IDCW?

IDCW plans are suitable for investors who seek potential income from their investments. On the other hand, Growth plans, where all the invested capital and gain stay invested in the fund, are suitable for those seeking long-term growth potential.

The choice between IDCW and Growth plans should align with your specific investment goals. If you don’t need income from your investments and are instead seeking to potentially build wealth over time, then an IDCW may not be suitable.

What is NAV and IDCW?

NAV and IDCW are two different concepts in mutual funds. Net asset value (NAV) represents the current market value of each unit of a mutual fund. It's calculated by subtracting the fund's total liabilities from its total assets and then dividing the result by the number of outstanding units. NAV is calculated on every business day, reflecting the fund's value at the end of a trading day.

Income Distribution Cum Capital Withdrawal (IDCW) is a facility for investors that involves the periodic distribution of a portion of the fund’s distributable surplus, which can include capital gains as well as dividend income, if any, from the underlying assets. This means that investors receive payouts whenever the asset management company releases a part of the distributable surplus. These payments are made at the discretion of the fund house. They are not guaranteed or fixed and may not follow a fixed schedule.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.