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July 29, 2022

What is IDCW in a mutual fund?

IDCW in mutual funds

IDCW in mutual fund means Income Distribution cum Capital Withdrawal. It is a dividend option in the market of mutual funds, and one can term it IDCW Mutual Fund. 

The change in the name introduced by (the Securities and Exchange Board of India) SEBI became operational in April 2021. Irrespective of the name change, the role of the dividends is the same.

As per SEBI regulations, the investors must know that they can use and distribute the income capital as dividends. 

Why did SEBI change the dividend name to IDCW? 

The term means the distribution of income of a mutual fund scheme. It includes dividends paid by stocks and capital gains made by selling stocks from the scheme portfolio.

The name change happened to highlight that the income is coming out of the depositor’s income value, which means the withdrawal of capital. 

The term IDCW accurately represents mutual fund dividends and will remove any misunderstanding about mutual fund dividends for the investors as per SEBI.  

The highlights of IDCW in mutual funds  

The IDCW is mainly selected by investors who want to access a periodic inflow of funds. Note that the IDCW happens at the discretion of the fund manager.

There is no specific assurance that it will be declared at periodic intervals. 

Investing in an IDCW mutual fund is a great alternative to conventional investment instruments like fixed deposits or savings schemes.

Senior citizens and investors who want to access low-risk returns can always consider IDCW mutual funds to brighten their investment portfolios.  

Things to consider about IDCW in mutual fund

There are many misconceptions floating around this field. Here are some facts that would help you break out of those misconceptions and plan better.  

  • Mutual fund scheme dividends may include the ones received from underlying stocks in the portfolio and profits books by selling those stocks. 
  • The dividends are not an extra income over the redemption profits you’ve made. The dividends, instead, are capital appreciation, which is ultimately paid from your capital. Therefore, the dividend scheme’s Net Asset Value (NAV) falls to the extent of dividends paid to you. 
  • In the case of the growth option, the profits are reflected in the NAV and reinvested in the scheme. 
  • At the discretion of the AMC or fund manager, a portion of the profit gets distributed to the investors in IDCW. However, it must be noted that this is not mandatory for an AMC under the dividend option.

Tax benefits associated with IDCW in mutual funds  

If you are a short-term investor, opting for IDCW in mutual funds is a viable option. That’s why an IDCW in a mutual fund is more appealing to conservative investors. However one cannot deny the importance of the tax benefits of IDCW in mutual funds.  

Since the payout of IDCW in mutual funds is regular, whatever payout you receive is included in the income of the investor.

And as IDCW offers an investor the promise of regular cash flow, you can always opt for such a mutual funds scheme. Note that the payout frequency of the IDCW is solely dependent on the fund manager.  

IDCW pays out from the surplus investment accumulated. Income received by the investor as IDCW is added to the gross taxable income. Moreover, it is taxed based on the income tax slab rate of the investor. 

Being a dividend distribution plan, dividends in IDCW exude practicality to the investors. Usually, retired investors want regular income from their portfolios. In that case, opting for IDCW in mutual funds is an excellent idea. Here are some noteworthy points of IDCW funds you should be aware of.  

  • Based on SEBI, the dividends can only be paid from the profits earned by the respective mutual fund.  
  • The payout rates of dividends may vary based on the payout cycle  
  • Dividends paid on both debt and equity mutual funds can be taxed as per the investor’s tax slab.  
  • Investment experts recommend the IDCW option when the market trajectory is moving upwards. During this time, the net asset values of funds rose consistently. Moreover, there is a greater likelihood of a fund declaring great dividends.  

Where should investors invest? IDCW or Growth 

Considering the in-growth option, the profits made by the scheme remain in the scheme investment. For long-term investment, the investor will profit for a long time.

It is also known as compounding and will have a prominent role in wealth creation for investors.  

IDCW in a mutual fund is something where the profits will improve the scheme, and the investor will get the best distribution with full or partial discretion of the fund manager with AMC.

In this option, you will lose the compounding advantages the investors receive periodically. If the investor wishes to have a daily cash flow of the investment, then IDCW will be your best option.  

Who should opt for the IDCW in mutual funds?

IDCW in mutual funds is best suited for – 

  • Investors looking for a regular income through their investments.
  • Investors with low-risk tolerance levels. 
  • Those looking for dividends during the bare market phase.
Conclusion 

Your choice of investment depends entirely on your financial goals. Moreover, you should also consider your investment horizon and tax situation to choose the best mutual fund.

To be precise, IDCW mutual funds are suitable for those who want to have access to periodic payouts. Investing in mutual funds is a viable way to accumulate money for bigger purposes in life.

If you want an investment portfolio with minimum risks, opting for IDCW is a better alternative. 

FAQs

Is IDCW income subject to tax?

Yes, the IDCW income is added to your taxable income. It is subject to normal tax-slab rates. And if the dividend exceeds INR 5,000, there’s also TDS on IDCW.

What does IDCW stand for?

IDCW stands for ‘Income Distribution Cum Capital Withdrawal’.

Can we change from IDCW to growth?

Yes, you can. But it must be noted that depending on how long you had invested, the switch will attract capital gains and exit load.

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The cap covers any money sent abroad for purchases, travel, education, or other international transactions during the year. The investor's brokerage account has to be filled before making any investments in US equities. Investors must complete Form A-2, which is available from RBI-authorized dealers. Any sum over the $250000 cap requires RBI approval. Additional read: US stocks for investing in child education 4. Taxation To make your efforts worthwhile, it is crucial to take into account the tax consequences of your international assets. Due to the Double Tax Avoidance Agreement (DTAA) between the US and India, the same income cannot be taxed twice on investments made in the US stock market. 5. Dividend tax The dividends from US stocks are taxed at a fixed rate of 30% for overseas investors. However, as a result of the tax agreement between the US and India, citizens of India pay a 25% tax rate (deducted before distribution). However, because of the double tax avoidance agreement between the US and India, the tax paid in the US may be claimed as a foreign tax credit in your domestic filing. 6. Capital gains tax Your assets in the US are not subject to capital gains tax. However, India requires you to pay tax on your overseas capital gains. This may be divided into two groups.: Long-term capital gain (LTCG)If you keep the equities for more than 24 months before realizing capital gains, you will be subject to indexation advantages and a 20% tax rate in addition to any relevant fees and other surcharges. Short-term capital gain (STCG)Standard income-tax regulations apply to any gains from assets held for less than 24 months, and they are added to your ordinary taxable income. You must also take into account the recently implemented Tax Credited at Source or TCS. Under the new regulations, a 5% TCS will be applied to all international transfers over INR 7 Lakhs in a fiscal year. It is not an additional expenditure to deduct this advance tax when submitting your taxes each year. Charges on US stock-broking account  Using an Indian stock brokerage account to invest in the US stock market is prohibited. You would need to create one with a US stock brokerage company instead. To provide this service, the majority of Indian stock brokers who allow you to invest in US equities typically collaborate with a US stockbroker. You would also be required to pay certain fees for a US stock broking account, just like you would for an Indian trading account. This is something you should also take into consideration when you buy US stocks because these fees can reduce your earnings. These fees include Annual Maintenance Costs, brokerage charges, bank charges, transaction charges, and more. Invest in the US stocks with EduFund  Download the EduFund app and create an account to start investing in US stocks. With zero charges and no hassle account opening process from the comfort of your home, you can start investing in FAANG stocks in your portfolio to geographically diversify your portfolio!! Thus, investing in US firms and equities may give investors access to the worldwide market, credibility, and an opportunity to increase their wealth. Consult an expert advisor to get the right plan TALK TO AN EXPERT
5 top investments for risk-averse investors

5 top investments for risk-averse investors

All investments are associated with risks. Yet, the risk is not uniform, and it's essential to be aware of the different levels of risks linked with all types of investment instruments. This is why the first thing to consider before investing is how much of a risk appetite has – how much risk one is willing to take. Want to know the best investment options for risk-averse investors but still generate good returns? Continue reading this article to know more! What is risk averse? Risk-averse refers to an investor who chooses to preserve the capital over and above its potential to generate returns that are higher than the average. Risk can refer to many factors – volatility, currency, market, credit rating, etc. Risk-averse can also refer to a conservative investor. Low risk symbolizes stability in investments. A low-risk investment generates guaranteed reasonable returns, if not outstanding, above benchmark returns. But chances are near zero that the principal investment amount will be lost. Whereas a high-risk investment option may gain or lose money over time. Risk-averse investors are unwilling to accept market volatility. They prefer their investments to be highly liquid - readily available to be withdrawn. Such investors usually include old investors or retired individuals who depend on their savings for their daily expenses. Start Investing in Mutual Funds Is FD a good option for risk-averse investors? One should constantly adjust their returns against the current inflation rate. The current Fixed Deposit interest rates are 5-7% p.a. on average. But the current inflation rates are around 6-8% p.a. Give these figures a thought. The price you pay for your everyday goods and services is rising at 6-8%, whereas your FD investments are growing at only 5-7%. FDs do not increase the value of your money over time. In fact, you actually lose money or its purchasing power over time. Do you think FDs are the safest investment option? Banks defaulting on payments is rare but definitely possible. The Deposit Insurance and Credit Guarantee Corporation (DICGC) guarantees Rs. 5 lakhs per person per bank if the bank defaults. Let's not forget the liquidity part of this instrument. Fixed deposits can have a lock-in ranging from 3-5 years. Banks penalize the investors for withdrawing money before the lock-in is over. This penalty is in the form of a reduction of interest rate by a certain percentage. Download App and Start Saving for Child Education What are the best investment options for risk-averse investors? The market is filled with many investment options for investors with varying risk appetites. Let's look at some of the best investment options for risk-averse investors: 1. Short-term bond fund The best alternative for investors who do not want exposure to FDs or volatile instruments. Short-term bond funds – bond funds with low maturity and a high potential to offer better returns. Debt Funds with longer maturity are subjected to interest rate risk. But short-term bonds have a lower interest rate risk as their maturity period is much lower. 2. Municipal and Corporate Bonds State and local governments and companies usually raise money by issuing bonds to the public. Bonds offer lower risk than stocks. When a company is winding up, the bondholders are given first preference in the payment and settlement order. 3. Other debt funds Other debt funds include banking and PSU Funds, ultra-short duration funds, Dynamic Bonds, etc. You could always invest a lump sum in these debt-based mutual funds and opt for a Systematic Withdrawal Plan (SWP). This would ensure that along with the returns being generated on your investments, you would also get a monthly income from these investments. This investment option is one of the best options for older people who want a monthly income. 4. Liquid funds Invest in top-rated liquid funds to avoid loss of capital with a higher degree of safety for your primary investment. Also, when the market moves up, your investment performs better and generates higher returns in line with the market. 5. Dividend growth stocks Stocks are not as safe as cash, savings, or other debt-based instruments. But they are safer than options and futures. Dividend-paying stocks are considered safer than high-growth ones as they minimize volatility, if not eliminate it. You don't depend on the value of the stock as you get a dividend as a regular income on your investment. Apart from debt-based investments, you could also apply a staggered investment approach in equity-based mutual funds for a long-time horizon. A periodically rebalanced portfolio helps you minimize your portfolio volatility and ensures efficient capture of up-market and down-market movements even with equity exposure.  Take the help of an Investment Advisor who will guide you through goal-based planning and help you choose the investments that are most suitable to your goals and objectives and your risk appetite. FAQsWhat type of investments do risk-averse investors prefer?  Risk-averse investors typically prefer conservative investments with lower volatility and more predictable returns. These may include government bonds, high-quality corporate bonds, certificates of deposit (CDs), and stable dividend-paying stocks. These options aim to preserve capital while providing modest growth, aligning with the risk tolerance of such investors.   What are 3 high-risk investments?  Three high-risk investments include investing in individual stocks of volatile and speculative companies, trading in cryptocurrencies known for their price volatility, and investing in startups or early-stage ventures that have higher failure rates. These investments offer the potential for significant returns but also carry a substantial risk of loss.   Which investment is the riskiest for investors?  Investing in highly speculative and unproven assets like cryptocurrencies, especially in lesser-known or new coins, can be among the riskiest options for investors. The volatile nature of these assets can lead to substantial financial losses due to sudden price fluctuations and lack of regulation.   Which investment has the highest return without risk?  No investment offers guaranteed high returns without any risk. Investments with potentially higher returns often come with varying degrees of risk. While some low-risk options like government bonds or savings accounts provide stability, they usually offer lower returns. Diversification and a clear understanding of risk are important for any investment strategy.  TALK TO AN EXPERT
5 types of mutual funds

5 types of mutual funds

Investing in mutual funds for your child’s education is always advisable. First of all, it is a less stressful option than investing in direct equity stocks because that requires you to have in-depth knowledge of market trends and fluctuations. Secondly, with mutual funds, there are a variety of schemes you can opt for depending on a range of factors. These factors could include the time period for which you can invest before liquidating, the amount of money you can invest, the amount you require to secure the education fund, the level of risk you can take, and so on.  When it comes to building an education fund, here are the top 5 types of mutual funds you can choose from. 1. Large-cap mutual funds The defining characteristic of large-cap equity funds is the fact that these funds invest in the top 100 Indian companies that have the highest market value. Large-cap mutual funds can bring in impressive returns if you remain invested for a long period. If you are a person who wants to avoid taking very high risks with your investments and has decided to invest early for your child’s education, this is the way to go. The average returns rate has historically beaten that of Fixed Deposits and similar investment alternatives. SIP Mutual Fund Investment Read More 2. Mid-cap mutual funds Mid-cap funds invest in Indian companies that come in the next best 250 in terms of market value. These funds are for you if you are ready to take on a higher level of risk. Justifiably, the return rates also tend to get higher. One way to satiate the risk appetite of mid-cap equity funds is to let them season for at least 7-10 years. If your child is in primary or middle school, investing in such a scheme will generate a wholesome amount of wealth by the time they are ready to pursue a college education.   How to track Mutual Funds? Read More 3. Equity-linked saving schemes  Among the various perks of investing in mutual funds is the tax deduction benefit. Equity Linked Saving Schemes are devoted to enabling investors to save taxes, as the name also indicates.  The only catch here is that it has a compulsory lock-in period of at least 3 years. The aim here is to keep you invested longer to counter the risk level. If you can spare that amount of time, then ELSS is definitely a go-to. An added benefit is the historically high level of returns.   Mutual Funds to invest in Child Education Read More 4. Low-risk options  There is this whole myth surrounding mutual funds that they only come with a high-risk factor. On the contrary, a debt fund is also a kind of mutual fund that comes with low risk, so much so that it remains undisturbed by market fluctuations.  Debt funds are still a better option than Fixed Deposits because they can generate a higher percentage of returns. So, if you are not in favor of taking high risks, debt funds are a go-to.  5. Hybrid mutual funds  If you are confused about your investment options or even hesitant about risking too much, the answer to your problems is a hybrid mutual fund. This kind of fund is a mixture of equity as well as debt.  Hybrid mutual funds bring in the best of both worlds. They tend to generate good returns at low risk. FAQs What are the different types of mutual funds? Large-cap mutual funds Mid-cap mutual funds Equity-linked saving schemes Low-risk options Hybrid mutual funds Which type of MF is best? The best type of mutual fund is the Hybrid mutual fund. Which MF gives the highest return? Equity-linked mutual funds are considered the mutual funds with the highest returns. Conclusion There will be miscellaneous financial goals you will be required to set if you are a family person. One among these might be to straighten up the roadmap to your child’s academic and career aspirations. The first step is calculating your expected expenses with the help of an education cost calculator. The calculator will help you draw your investment map to fulfill your child's aspirations. The earlier you invest, the more prepared you will be to make critical decisions as the moment arrives. DisclaimerMutual funds are subject to market risks. The previous performance of a fund is no guarantee of future success. Please reach out to an expert to know more about the schemes before investing.
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