What is IDCW in Mutual Funds?
- 7 min read
Have you just started mutual funds and are overwhelmed by hearing the term ‘IDCW’? You might think about how it is related to your return. ‘IDCW’ stands for Income Distribution cum Capital Withdrawal. The Securities and Exchange Board of India (SEBI) has changed the term ‘dividend option’ to ‘IDCW’.
Read this blog to know IDCW meaning, why it has changed, and the advantages of IDCW in mutual funds.
What is IDCW in a Mutual Fund?
IDCW is a feature of mutual funds that allows investors to take out a portion of their invested capital and receive monthly income distributions from the fund.
Investors who are looking for a steady income stream and the flexibility to access their money can benefit from this feature. Using this feature, you may easily reach your financial goals and efficiently manage cash flow.
Applying it to all previous transactions, the SEBI changed the word ‘dividend plan’ to ‘Income Distribution cum Capital Withdrawal Plan’ in April 2021. The payment is divided into capital withdrawal and income distribution after the change. You can see this detail in the monthly Consolidated Account Statement (CAS).
How do IDCW in Mutual Funds Operate?
If you invest in a mutual fund dividend plan, you have to choose to receive dividend payouts regularly. A mutual fund announces a dividend. If you are eligible, you get allocations of these profits in proportion to your fund investment. The IDCW amount for you is determined according to the NAV of the fund and the total time you have been holding the units.
Depending on the mutual fund, redemption fees or exit loads are payable. You have the option of making a one-time withdrawal or establishing a recurring withdrawal schedule.
Let us understand it with an example.
Example of IDCW in Mutual Funds
Suppose you invest INR 1,00,000 in a mutual fund IDCW. During a fiscal year, the fund announces a dividend of INR 5,000. This amount represents your income distribution, and it will not be taken away from your capital investment.
You can take out an extra INR 10,000 from your investment by redeeming the required units if you need money for any emergencies. In this case, you get a total of INR 15,000.
This flexibility enables both the remaining portion of your investment to grow and manage your emergency needs.
Advantages of IDCW in Mutual Funds
Purchasing IDCW mutual funds may help you in a number of ways. Some of them are:
-
Flexibility
You have the flexibility of reinvesting the income to purchase additional mutual fund units or receiving it as cash.
-
Regular Income
IDCW can be beneficial for retirees or others looking for a consistent cash flow to cover their daily expenditures. Investors may keep a steady income stream without having to liquidate their interests with this IDCW payout option.
-
Balance in Income and Growth
You can balance your income and growth using IDCW.
-
Cash Flow Management
You may receive recurring dividends that can be applied to retirement planning, or EMI with this IDCW.
IDCW Types in Mutual Funds in India
There are primarily 2 types of IDCW in mutual funds. One is regular IDCW, and the other is growth IDCW.
-
Regular IDCW
You receive a consistent income in the form of monthly, quarterly, or annual payouts from regular IDCW. This option is appropriate for investors who depend on the mutual fund to get a consistent flow of income.
-
Growth IDCW
In growth IDCW, income dividends are reinvested back into the mutual fund scheme, which increases capital over time. If you value long-term growth and wish to compound your gains, this is the best for you.
Who Can Benefit the Most From the IDCW Plan?
-
People With Financial Unstability
The IDCW plan is beneficial for working professionals with unstable income or independent contractors. This consistent income stream from an IDCW plan lessens their financial problems.
-
Retirees
A consistent income stream from assets is also necessary for retirees. IDCW plan can help them fulfil their daily needs without having to liquidate assets.
-
Investors Who Prefer Not to Sell Investments
IDCW is also beneficial for investors who want to receive dividend payments regularly rather than sell units from their mutual fund portfolio.
However, if you are planning to invest in mutual funds, download the PL Capital Group – Prabhudas Lilladher application and open a Demat account for free. With PL, you can get investment recommendations which help you choose the appropriate scheme for you.
For What Reason Did SEBI Switch the Dividend to IDCW?
The reason behind the name change by SEBI is to dispel misunderstandings regarding dividends concerning equities vs mutual funds. The purpose of this vocabulary change is to better describe the nature of these programmes. Earlier, the phrase ‘Dividend Plan’ misled some investors into thinking it was a guaranteed bonus that was distinct from their investment returns.
All transactions are given this new designation immediately. According to the NAV at the time of payout versus the underlying capital, you can see a breakdown of distributions as either income or capital in the monthly CAS that investors get.
Factors to Consider Before Investing in the IDCW Plan
-
Dividend Payout
You should be aware of this information, regardless of whether you receive dividends monthly, quarterly, or annually. As a result, you will receive useful cash flow planning and financial management suggestions.
-
Dividend Composition
Evaluate the sources of dividend distributions before selecting an IDCW plan. This entails determining if you get dividends from a mutual fund’s profit or other sources of income.
-
Dividend Taxation
Tax implications are a crucial factor you must take into account while choosing an IDCW plan. You must be aware of the applicable rates, exemptions, and deductions and the tax treatment of dividends.
Taxation in IDCW
Earlier, businesses had to pay a 15% Dividend Distribution Tax (DDT) on dividends. However, starting in April 2020, investors’ dividend income would be taxed by their individual income tax slabs under mutual fund schemes.
For instance, you would pay 30% tax on profits received through IDCW if you are in the 30% tax band. Additionally, a 10% tax deducted at source (TDS) rate would be applied if the total dividend amount in a fiscal year exceeded INR 5,000.
Final Thought
The SEBI has renamed the dividend plan to IDCW to increase transparency and reduce confusion that these distributions may involve a withdrawal from the investor’s capital. Understanding the IDCW meaning and its benefits can help you secure a regular income. This makes it suitable for individuals who require a steady cash flow, such as retirees or those with irregular incomes.
Download the PL Capital application to invest in mutual funds. PL allows you to use both lump sum and SIP for investing in mutual funds.
Frequently Asked Questions
1. What does IDCW reinvestment mean?
With IDCW reinvestment, the mutual fund’s revenue is reinvested back into the scheme rather than being given to investors.
2. In a mutual fund, which is better between growth or IDCW?
It depends on your financial needs and your goals. IDCW can be a better choice if you need a steady income. However, since the growth option allows the gains to be reinvested and compounded over time, it could be more appropriate for long-term wealth accumulation.
3. What disadvantages does IDCW have?
One significant drawback of IDCW is paying high taxes. Depending on the investor’s tax level, the revenue may be subject to higher taxes. Additionally, funds may see less wealth compounding than growth funds if they depend too heavily on IDCW distributions.
PL Blog
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
