IDCW in Mutual Funds: Meaning & How It Works?

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 (Income Distribution cum Capital Withdrawal) in Mutual Funds?

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).

Why Did SEBI Replace Dividend with IDCW? 

SEBI replaced the term dividend with IDCW through Circular No. SEBI/HO/IMD/DF3/CIR/P/2020/194 dated 5 October 2020, effective 1 April 2021. The rename addressed a long-standing misconception that mutual fund dividends were extra income paid from profits. In reality, every payout reduces the scheme’s NAV because part of it comes from the investor’s own capital. The new label, Income Distribution cum Capital Withdrawal, makes that clear. SEBI also mandated AMCs to disclose, in the Consolidated Account Statement, how much of each payout is income distribution and how much is capital withdrawal.  

How do IDCW in Mutual Funds Work? 

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:

1. Flexibility

   You have the flexibility of reinvesting the income to purchase additional mutual fund units or receiving it as cash.

2. 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.

3. Balance in Income and Growth

   You can balance your income and growth using IDCW.

4. Cash Flow Management

   You may receive recurring dividends that can be applied to retirement planning, or EMI with this IDCW.

Types of IDCW in Mutual Funds 

There are primarily 2 types of IDCW in mutual funds. One is regular IDCW, and the other is growth IDCW.

1. 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.

2. 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.

IDCW vs Growth Option: Which is Better? 

 Both options invest in the same underlying portfolio. The difference lies in how scheme profits are handled. 

If your goal is long-term wealth creation, Growth is the better choice. If you specifically need regular cash flows and accept the tax and compounding trade-off, IDCW may suit you. 

Who Should Invest in IDCW Plans? 

• 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.

Factors to Consider Before Investing in the IDCW Plan

1. 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.

2. 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.

Taxation of IDCW in Mutual Funds

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.

Conclusion

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.

4. SWP vs IDCW: which is better? 

SWP gives you control; IDCW does not. In an SWP, you decide the withdrawal amount and frequency, and units are redeemed from your holding to fund it. In IDCW, the AMC decides whether to declare a payout, how much, and when, with no guarantee of regularity. SWP is taxed only on the capital gains portion of each withdrawal, while the entire IDCW payout is added to your income and taxed at your slab rate. For predictable cash flows, SWP is generally the better tool.

Try Our SWP Calculator to Estimate Your Returns!  

5. How to claim IDCW in a mutual fund? 

You do not need to claim IDCW separately. If you hold units under the IDCW option on the record date declared by the AMC, the payout is automatically credited to your registered bank account, usually within a few working days. The NAV of the scheme falls by the amount distributed. If you have opted for the IDCW reinvestment option, the payout is reinvested as additional units instead of being credited as cash.  

6. Who is eligible for IDCW? 

Any investor holding units under the IDCW option of a mutual fund scheme on the record date is eligible to receive the payout. Eligibility is not based on income, age, or investor category; it depends only on whether you hold units under the IDCW option, not the Growth option, on the cut-off date set by the AMC. NRIs are also eligible, subject to applicable TDS rules on the payout.