Understanding Income Distribution cum Capital Withdrawal (IDCW) in Mutual Funds
When investing in mutual funds, you might come across the term IDCW, which stands for “Income Distribution cum Capital Withdrawal.” Understanding IDCW is crucial for making informed investment decisions, as it directly impacts the way you receive returns from your mutual fund investments. Hence, it is essential to understand the structure and implications of IDCW thoroughly. In this article, let’s dive deep into what IDCW in mutual funds means, top IDCW mutual funds in India, benefits of IDCW, growth vs IDCW option in mutual funds, taxation, and more.
What is IDCW in Mutual Funds?
IDCW in mutual funds stands for Income Distribution cum Capital Withdrawal. It is an investment plan offered by mutual funds where investors receive regular income from their investments. IDCW allows investors to benefit from both income distribution and capital withdrawal, providing a combined benefit from their investment.
Investors can receive IDCW payments from a mutual fund’s NAV even if the fund does not make profits. This is because IDCW payments encompass income and capital withdrawal, allowing investors to receive a consistent return on their investments. This structure can be particularly appealing for those seeking a steady income stream without having to liquidate their holdings.
How Does Income Distribution cum Capital Withdrawal Work?
Now that we have covered the IDCW meaning in mutual funds, here is how Income Distribution cum Capital Withdrawal works:
- Profit Distribution: When a mutual fund earns profits, it can either reinvest them back into the fund or distribute them to its investors.
- Issuing IDCWs: If the fund chooses to distribute the profits, it does so by issuing IDCWs to its investors. IDCWs are essentially units of the fund that represent the investor’s share of the profits.
- Determining Amount: The fund’s NAV and the investor’s holding period determine the amount of Income Distribution cum Capital Withdrawal received by the investor.
- Regular Payouts: IDCW payouts can be made regularly, such as monthly or quarterly, providing a predictable income stream.
- Taxation: IDCW payments are taxed as capital gains by tax authorities, often at a lower rate than regular income, although they still incur taxation. This makes IDCW a tax-efficient way to receive regular income.
Types of IDCW in Mutual Funds
Now that we have covered the meaning of IDCW in mutual funds, let’s understand the two main types of IDCW in mutual funds:
Regular IDCW: This option is ideal if you are looking for a regular income stream from your mutual fund investment. With regular IDCW options, you can receive periodic income distributions at specific intervals, whether monthly, quarterly, or annually. It’s a great way to supplement your income and meet your financial needs while still keeping your capital invested. This type of IDCW is suitable for retirees or those needing a steady cash flow.
Growth IDCW: If you are more focused on long-term capital growth rather than immediate income, then Growth IDCW might be the way to go. In this type, instead of distributing the revenue generated, the mutual fund scheme reinvests it back into the scheme. By doing so, the aim is to maximise capital appreciation over time, potentially leading to good returns in the future. This option is better suited for investors with a long-term horizon who do not need immediate cash payouts and are looking to build wealth over time.
What is SEBI’s New Rule on Dividend Plans?
SEBI has renamed the Dividend Plan to the Income Distribution cum Capital Withdrawal (IDCW) Plan. This change came into effect in April 2021. The IDCW option in mutual funds aims to provide clarity and transparency to investors regarding the nature of payouts.
Why did SEBI Rename Dividend Plan as Income Distribution cum Capital Withdrawal Plan?
The reason behind this change is to avoid confusion caused by the term “dividend.” Mutual fund dividends are usually perceived as being paid from a company’s profits. However, IDCWs can be paid out of a mutual fund’s NAV, even if the fund didn’t make any profits. To make things clearer for investors, the IDCW Plan combines income distribution and capital withdrawal. This ensures transparency and helps investors understand where their returns are coming from.
3 Things Investors Should Know Before Choosing the IDCW Plan
Let’s look at three factors that you should consider before choosing the IDCW plan.
Dividend Composition
Understanding the dividend composition before opting for the IDCW in mutual funds is important. This involves examining the sources of the dividend payments, such as profits generated by the mutual fund, interest income, or any other income. Knowing the composition helps in assessing the sustainability and reliability of the income distributions.
Dividend Payout
You must be aware of the dividend payout mechanism associated with the IDCW plan. Understanding the frequency of dividend distributions involves determining whether they are paid monthly, quarterly, or annually. This knowledge helps in planning your cash flow and managing your finances effectively.
Dividend Taxation
Tax implications can be crucial for investors contemplating the IDCW plan. Effective financial planning requires understanding how taxes treat dividends from the plan. You should know the applicable tax rates on dividends received and whether any exemptions or deductions are available. Being informed about the tax treatment helps in optimising your after-tax returns and aligning your investment strategy with your financial goals.
Who Should Invest in Income Distribution cum Capital Withdrawal?
Here are some of the people who might benefit from investing in Income Distribution cum Capital Withdrawal (IDCW) plans:
Retirees
Retirees who need regular income from their investments may find IDCW plans a good option. IDCW payments can provide a steady income stream, and the tax treatment is favourable for retirees. The dividends declared by mutual funds under the IDCW option can help meet daily expenses without the need to sell investments.
People with Unpredictable Income
People with unpredictable income, such as freelancers or self-employed individuals, may also find an IDCW plan suitable. Income Distribution cum Capital Withdrawal payments can provide a regular stream of revenue, even if their income fluctuates. This consistency can be beneficial in managing financial stability.
People Who Want to Avoid the Hassle of Selling Units
IDCW plans can be a suitable option for those who want to avoid the hassle of selling units from their mutual fund portfolio. With an IDCW plan, you can receive regular income without having to sell your units. This can simplify the process of accessing funds.
However, it is important to note that Income Distribution cum Capital Withdrawal plans may not be suitable for everyone. Investors looking to grow their wealth over the long term might be better off investing in a growth-oriented mutual fund.
Benefits of Income Distribution cum Capital Withdrawal
Income Distribution cum Capital Withdrawal in mutual funds offers several benefits for investors, including:
Generating Regular Income for Investors
With IDCW, you can receive regular income distributions from your mutual fund investments. It’s like getting a paycheck from your investments, which can help meet your day-to-day expenses or provide a steady income stream.
Managing Cash Flow and Meeting Financial Obligations
IDCW mutual funds may allow you to manage your cash flow better. By receiving periodic income distributions, you can easily cover your regular expenses, make loan payments, or even plan for your retirement income.
Balancing Income Distribution and Capital Appreciation Goals
IDCW in mutual funds strikes a balance between generating income and potentially growing your investment. You can enjoy the benefits of regular income while still having the potential for your investment to increase in value over time.
Diversification and Risk Management
Mutual funds typically invest in a diverse range of securities, which helps spread out the risk. By opting for IDCW, you can benefit from this diversification while receiving regular income. It can add stability to your investment journey.
Tax Advantages
Depending on the tax regulations in your country, IDCW may offer certain tax advantages. For example, the government may impose a lower tax rate on dividend income compared to capital gains. To fully understand the specific tax advantages and consequences relevant to your situation, consulting a tax advisor is recommended.
Taxation Aspects of Income Distribution cum Capital Withdrawal in Mutual Funds
The taxation aspects of Income Distribution cum Capital Withdrawal in mutual funds are as follows:
Taxation of IDCW
IDCW is subject to capital gains tax, which is typically lower than the tax rate on regular income, though it remains taxable. The tax rate varies depending on how long the IDCW is held. If held for less than three years, it is taxed as short-term capital gains. If held for more than three years, it is taxed as long-term capital gains.
TDS on IDCW
If the amount of IDCW distributed to an investor is more than Rs. 5,000 in a financial year, the fund house will deduct TDS at the rate of 10%. As a result, the TDS will be credited to your income tax account and adjusted against the final tax liability.
Exemptions from Taxation
Some IDCWs are exempt from taxation. For example, IDCWs received by senior citizens (above 60 years of age) are exempt from tax.
As an investor, you can consider specific strategies to optimise tax efficiency in IDCW. These include choosing growth-oriented mutual fund schemes instead of dividend-oriented schemes, utilising tax-saving mutual funds, and aligning investments with your overall tax planning goals.
What is the Difference Between Dividend Declared by Companies and IDCW from Mutual Funds?
The key distinction between dividends declared by companies and IDCW from mutual funds is that dividends from mutual funds are paid out of the company’s profits, whereas IDCW is drawn from the fund’s net asset value (NAV).
When a company declares a dividend, it returns some of its profits to its shareholders. The company’s board of directors determines the dividend amount and usually pays it out quarterly. This cum dividend approach ensures that the profits are shared with the shareholders directly from the company’s earnings.
However, the Income Distribution cum Capital Withdrawal (IDCW) works differently. When a mutual fund earns profits, it can either reinvest them back into the fund or distribute them to its investors. If the fund chooses to distribute the profits, it does so by issuing IDCWs to its investors. IDCWs are units of the fund that represent the investor’s share of the profits. Unlike company dividends, mutual fund IDCW means that the payment can come from the NAV, not just the profits.
Key Differences
| Aspect | Dividends Declared by Companies | IDCW from Mutual Funds |
| Source of Payment | Dividends declared by mutual funds are paid out of the company’s profits, directly reflecting its profitability. | IDCW in mutual funds means payments can be made from the fund’s NAV, which may include profits or capital withdrawals. |
| Determination | The company’s board of directors decides the dividend amount based on quarterly profits and financial performance. | Fund managers determine IDCW payouts based on the fund’s performance, aiming to balance income distribution and capital preservation. |
| Payment Frequency | Dividends are typically paid quarterly. | IDCW payouts can be made monthly, quarterly, or annually, offering more flexibility. |
| Representation | Dividends are a direct payout from the company’s profits to its shareholders. | IDCW payouts are in the form of units representing the investor’s share in the fund’s profits or NAV. |
| Taxation | Dividends are taxed as dividend income, which may vary based on jurisdiction and tax laws. | IDCW payout means taxation as capital gains, often at a lower rate than regular income. |
| Investment Reinvestment | Dividend income cannot be reinvested directly by the company; shareholders must reinvest separately if desired. | IDCW payments can be reinvested back into the mutual fund, allowing for compounding of investment over time. |
Which Mutual Fund Scheme is Better – IDCW or Growth?
IDCW and Growth are both types of mutual fund schemes, but they have different investment objectives and strategies.
Income Distribution cum Capital Withdrawal (IDCW) schemes invest in a mix of equity and debt instruments. They aim to generate regular income for investors through dividends declared by mutual funds, which are reinvested in the scheme to grow the investor’s corpus over time.
Growth schemes, on the other hand, invest in a mix of equity and debt instruments. They aim to generate long-term capital appreciation for investors by reinvesting the profits into the scheme.
So, the best type of mutual fund scheme for you will depend on your individual investment goals and risk appetite. If you are looking for a regular income, then an IDCW scheme may be a good option for you. However, a growth scheme might be a better option if you want to grow your wealth over the long term.
Key Differences
| Aspect | IDCW (Income Distribution cum Capital Withdrawal) | Growth |
| Objective | Generate regular income through IDCW payouts. | Generate long-term capital appreciation by reinvesting profits. |
| Investment Mix | Invests in a mix of equity and debt instruments. | Invests in a mix of equity and debt instruments. |
| Income Distribution | Provides regular income through IDCW payouts which may come from the NAV. | No regular income distribution; profits are reinvested in the fund. |
| Reinvestment | IDCW payouts can be reinvested into the scheme. | Profits are automatically reinvested to grow the fund’s value. |
| Tax Implications | IDCW payouts are taxed as capital gains, often at a lower rate. | Growth option’s gains are taxed only when units are redeemed, potentially at long-term capital gains rates. |
| Risk and Return | Suitable for investors seeking regular income with moderate growth potential. | Suitable for investors seeking higher long-term growth and willing to accept more volatility. |
| Suitability | Best for investors needing regular income, such as retirees. | Best for investors looking for long-term capital growth, such as young professionals. |
| Payouts | IDCW offers periodic payouts, aligning with income-focused investment strategies. | Growth focuses on compounding returns over time, ideal for wealth accumulation. |
IDCW vs. SWP: Which Option is Better?
When it comes to generating regular income from your investments, two popular options often come into play: IDCW (Income Distribution cum Capital Withdrawal) and SWP (Systematic Withdrawal Plan). Both have their unique benefits and can cater to different financial goals.
IDCW (Income Distribution cum Capital Withdrawal) provides regular income from mutual fund profits, while SWP (Systematic Withdrawal Plan) allows fixed, predictable withdrawals by selling mutual fund units. Here’s a detailed comparison to help you understand which might be better suited to your needs.
| Aspect | IDCW (Income Distribution cum Capital Withdrawal) | SWP (Systematic Withdrawal Plan) |
| Definition | Regular payouts from the profits made by the fund. | Fixed amount withdrawals from mutual fund investments. |
| Income Distribution | Provides regular income without selling units. | Withdraws a fixed amount by selling units of the mutual fund. |
| Taxation | As of 2024, IDCW payouts are added to the investor’s taxable income and taxed as per the individual’s tax slab rate. Dividend Distribution Tax (DDT) is no longer applicable after it was abolished in 2020. | Withdrawals under SWP are subject to capital gains tax. Short-term or long-term capital gains tax is applied depending on the holding period of the units sold. |
| Market Performance Dependence | Payout frequency and amount depend on fund performance, leading to variable income. | Offers a predictable and steady cash flow regardless of market performance. |
| Customizable Withdrawals | Payouts are decided by the fund policy and market performance. | Investors can choose the amount and frequency of withdrawals. |
| Capital Reduction | Units remain intact as only profits are distributed. | Reduces the total investment value over time as units are sold. |
| Best For | Investors seeking regular income without selling their units. | Those needing a fixed, predictable income stream. |
| Considerations | Suitable for those comfortable with fluctuating payouts and associated tax implications. | Ideal for retirees or anyone wanting controlled withdrawals and tax efficiency. |
Choosing between IDCW and SWP may depend on your financial goals, need for regular income, and tax considerations. IDCW might be beneficial if you prefer to keep your units intact and are comfortable with variable payouts. SWP, on the other hand, could offer more stability and control, potentially making it a preferred choice for many retirees. It’s important to carefully evaluate your needs and consult with a financial advisor to make an informed decision.
IDCW in Mutual Funds – The Methodology
Before understanding the methodology of IDCW (Income Distribution cum Capital Withdrawal), it’s helpful to first understand what IDCW means in mutual funds. When an investor receives a dividend, it essentially signifies a withdrawal of their capital, with or without appreciation.
Let’s understand this with an example.
Suppose an investor holds 1,000 units of a mutual fund and the NAV of each unit is Rs. 50. The mutual fund declares an IDCW of Rs. 2 per unit.
Calculation:
- Number of units held: 1,000 units
- IDCW per unit: Rs. 2
Income Distribution Amount:
1,000 units x Rs. 2 per unit = Rs. 2,000
In this scenario, the investor would receive an income distribution of Rs. 2,000. This amount is a partial return of the investor’s original capital and can be taken in cash or reinvested in more units of the mutual fund. As a result, the net asset value (NAV) of the mutual fund would decrease by the income distribution amount.
Example of Dividend Payout
When an IDCW (Income Distribution cum Capital Withdrawal) plan pays out dividends to unitholders, the Net Asset Value (NAV) decreases, resulting in relatively lower overall returns compared to the growth option of the same fund. NAV represents the level of capital appreciation that has occurred in a fund over time.
Let’s understand how dividend distribution impacts returns with the help of an example.
Suppose you are an investor in the IDCW option of a large-cap fund. The fund’s current NAV is Rs. 10, and you own 100 units. This means your total investment value is Rs. 1000.
| Information | Amount (in Rs) |
| Number of units | 100.00 |
| NAV before dividend payout | 10.00 |
| Investment Value | 1,000.00 |
| Dividend per unit | 1.00 |
| Total dividend received (units X dividend per unit) | 100.00 |
| NAV after dividend payout | 9.00 |
| Investment value after dividend payout | 900.00 |
Common Misconceptions about IDCW in Mutual Funds
Let’s look at some important considerations before investing in IDCW in mutual funds.
- Misconception 1: Mutual funds primarily use income from underlying stocks to distribute dividends.
Reality: Mutual fund dividends can be disbursed not only from the income generated by the underlying stocks in the portfolio but also from the profits made by selling stocks within the portfolio.
- Misconception 2: Dividend option mutual fund schemes regularly book profits to pay dividends to investors.
Reality: Dividends from mutual funds do not represent additional income beyond the profits realised upon redemption. Instead, they can be in the form of capital appreciation, sourced from the investor’s capital.
- Misconception 3: Dividend option mutual fund schemes regularly book profits to pay dividends to investors.
Reality: The portfolio of a mutual fund scheme is consistent across all options, whether it’s growth or dividends. Profit booking is done by the fund manager at the scheme level and applies to all options. In the growth option, profits are reinvested and reflected in the NAV. In the IDCW option, the fund manager or AMC may distribute part of the profit to investors at their discretion. It is important to understand that profit distribution in the dividend option is not guaranteed by the AMC.
To Wrap It Up…
Income Distribution cum Capital Withdrawal (IDCW) in mutual funds provides you with a flexible and convenient way to generate regular income while also allowing for capital withdrawal. It offers a balanced approach to meet both income distribution and capital appreciation goals. These plans are designed to cater to different investor preferences and financial needs.
However, it’s important to carefully evaluate your investment objectives and risk tolerance before choosing an Income Distribution cum Capital Withdrawal plan.
FAQs about IDCW in Mutual Funds
IDCW full form in mutual funds is “Income Distribution cum Capital Withdrawal.” IDCW means a type of mutual fund plan that may allow investors to receive income from their investments while also having the flexibility to withdraw their capital if needed.
The choice between growth and IDCW depends on individual investor preferences and financial goals. Growth plans aim for capital appreciation, reinvesting returns in the fund to generate higher long-term gains. IDCW plans, on the other hand, may provide regular income along with the dividend option in mutual funds to withdraw capital.
IDCW reinvestment refers to reinvesting the income distributions received from an IDCW plan into the mutual fund.
IDCW plans may not have a fixed dividend yield like traditional dividend plans. The income distributions in IDCW plans vary and depend on factors such as the fund’s performance, market conditions, and the availability of distributable surplus.
IDCW interim meaning to the interim payments made by a mutual fund under the Income Distribution cum Capital Withdrawal (IDCW) plan.
The IDCW payout allows you to receive regular payments, which can include both the income generated by the fund (such as dividends and capital gains) and a portion of your original investment.
Mutual Funds Investments Guides on smallcase –
All about mutual funds, it’s types, taxation, NAV, apps for mutual funds just one click away, start your mutual funds and SIP Journey today on smallcase.
