What is IDCW in a mutual fund?
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.
Additional read: What is AUM in mutual funds?
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. But 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’ll 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 rise consistently. Moreover, there is a greater likelihood of a fund declaring great dividends.
Additional read: What are foreign direct investments?
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.
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.
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.
Consult an expert advisor to get the right plan
- Table of Contents