What is IDCW in Mutual Funds?

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  • 15 Jul 2023

IDCW is the acronym for 'Income Distribution cum Capital Withdrawal,' which SEBI introduced in April 2021 to replace the term 'Dividend Option' in mutual funds. If you have any mutual fund scheme under the dividend option, you will see IDCW mentioned next to the name of the mutual fund scheme in your statement of account sent by the asset management company (AMC).

In simple terms, IDCW signifies that the investor's capital is distributed as a dividend. Generally, mutual fund houses declare dividends based on the surplus cash generated by the scheme. In a Growth scheme, the surplus cash increases the NAV (Net Asset Value), whereas an IDCW mutual fund experiences a minimal change in its NAV because the dividend is distributed. This is why the NAVs of IDCW mutual fund schemes exhibit less aggressive movements than Growth scheme NAVs.

Let's understand this with an example. Consider you have 5000 units in a mutual fund with a NAV of Rs. 20. The fund quotes a dividend of Rs. 1 per unit. So, the fund will pay you a dividend of Rs. 5000 for your 5000 units.

However, this amount does not represent additional income. The fund will deduct Rs. 5000 from your investment as a dividend payment. On the day the mutual fund pays out the dividend to you, the scheme's NAV will decrease by Rs. 1 to Rs. 19 from Rs. 20. IDCW schemes may pay dividends daily, weekly, monthly, quarterly, or annually.

Why SEBI Changed the Nomenclature of Dividends to IDCW?

Due to the naming of the Dividend Plan, numerous mutual fund investors misconstrued it as an additional bonus on top of the returns provided by their investment scheme. However, this perception is misleading. When receiving dividends from a mutual fund scheme, the scheme allocates a portion of the existing funds to you, which were originally yours.

SEBI emphasized this and stressed that this income solely originates from the investor's investment value. According to SEBI, the term IDCW presents a more precise portrayal of mutual fund dividends, ensuring that investors clearly understand these dividends.

Taxability of IDCW in Mutual Fund

Your income from the IDCW plan is combined with your overall annual income and is subject to taxation based on your respective tax bracket. Therefore, if you fall within the highest tax bracket, you need to pay 30 percent tax.

The table below compares IDCW and growth mutual funds on several parameters that will help you make an informed choice:

Profits Made by the Fund

Distributed among investors

Reinvested into the scheme

NAV

Ex-dividend NAV is lower as the dividends are paid from the fund’s NAV

NAV is higher as profits are reinvested

Total returns

Lower as dividends are paid from time to time

Usually higher than IDCW plans

Taxation

Taxed as per the investor’s tax slab

Short and long-term capital gains are applicable as per the holding period

Suitability

Suitable for those who are looking for regular cash flow from their investments

Suitable for investors looking for long-term wealth creation

Parameters IDCW Growth
Profits Made by the FundDistributed among investorsReinvested into the scheme
NAVEx-dividend NAV is lower as the dividends are paid from the fund’s NAVNAV is higher as profits are reinvested
Total returnsLower as dividends are paid from time to timeUsually higher than IDCW plans
TaxationTaxed as per the investor’s tax slabShort and long-term capital gains are applicable as per the holding period
SuitabilitySuitable for those who are looking for regular cash flow from their investmentsSuitable for investors looking for long-term wealth creation

Note that in IDCW plans, you lack control over the timing of fund disbursements, as the fund house determines when and how much to distribute. Consequently, relying on it as a consistent source of income becomes unreliable. Additionally, the magic of compounding remains out of reach for your investment since the fund house distributes the gains without being reinvested.

FAQs

IDCW stands for Income Distribution Cum Capital Withdrawal. Previously known as the 'Dividend Option', this feature allowed investors to choose between receiving dividends or reinvesting them. However, in April 2021, SEBI implemented a name change, replacing the familiar term 'Dividend Option' with IDCW.

You can do so by selling old units and purchasing new units. However, it's important to be mindful of exit loads and taxes on capital gains.

If you are looking for regular interest income, you can invest in IDCW schemes of mutual funds. However, be mindful that the distribution of dividends is at the discretion of the fund house, and you may also need to forgo compounding interest benefit.

Yes. The income you get is added to your annual income and taxed as per your tax slab.

Both IDCW and direct growth plans have their pros and cons. If you are looking for regular income, you can choose IDCW. On the other hand, for long-term wealth creation, it's better to opt for direct growth plans.

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