What is IDCW in Mutual Funds?

What is IDCW in Mutual Funds? To trade effectively, a stock or mutual fund investor must be familiar with numerous terminologies and approaches. Knowing the terminology is essential because mutual funds differ significantly from equities.

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You need to understand terminology like direct, regular, growth, and dividend as a mutual fund investor to invest effectively. Regular and direct investment methods contrast with growth and dividend distribution methods for the distribution of profits.

As a result of investing in the same financial instruments, growth and dividend plans in mutual fund schemes are essentially two sides of the same coin. Dividend plans, in contrast, pay out gains to investors, whereas growth plans reinvest all profits produced by the program.

Based on the quantity of units you own, a dividend program pays out rewards. A scheme might issue a dividend of INR 10, for instance, and if you own 1,000 units, you would receive INR 10,000 as the dividend.

The Securities and Exchange Board of India, SEBI, altered the nomenclature of “dividend” to “IDCW” in April 2021. The name “dividend” has become obsolete.

IDCW in Mutual Funds

The acronym “IDCW” stands for “Income Distribution and Capital Withdrawal”. By purchasing dividend options, or as you may say, by opting for the IDCW plan, the investor ensures that he will be paid dividends for any profits made from the underlying mutual fund scheme. Or, to put it another way, the scheme’s profits are put back into it and distributed to investors as dividends. Dividend payout or reinvestment are the two options available to investors. In contrast to the dividend reinvestment, which entails the investors’ purchase of more units, the dividend paid out entails the payout of declared gains to the investors. Quarterly, yearly, or biannual dividend payments are all possible.

When you invest in a mutual fund scheme, you have two options: growth and dividends. The underlying portfolio remains the same, no matter which option you pick. The way that earnings are allocated in the schemes, however, distinguishes these choices. While the growth option provides capital appreciation, the IDCW option (formerly known as dividend) allows you to choose to receive your investment returns as dividends at regular intervals.

IDCW denotes the ability to distribute a portion of an investor’s money that has been earned as a dividend. Before April 2021, in mutual funds, there was a dividend plan and a growth plan for providing profit. However SEBI changed the name of the dividend plan, and it became the IDCW plan.

Companies that offer mutual funds typically issue dividends based on the extra money that was raised by the plan. The excess capital in a growth plan is utilized to increase the NAV (net asset value), but because the dividend is paid out, the NAV in an IDCW mutual fund doesn’t increase as much.

Because of this, the NAVs of IDCW mutual fund schemes fluctuate far more slowly than the NAVs of growth schemes. In IDCW systems, dividend payments may be made every day, every week, every month, every three months, or every year.

Purpose of Introducing IDCW in Mutual Funds

In reference to mutual funds, the main reason for changing the name of the dividend option’ by SEBI and renaming it as ‘IDCW’ is that many investors mistook it for a bonus in addition to the profits that their scheme is providing. This was quite deceptive and might have an impact on an investor’s investment strategy. So to bring clarity about the profit, SEBI took this decision.

When it comes to mutual funds, many are unaware of the distinction between income distribution and capital distribution. The former shows a rise in NAV, while the latter shows how much money an investor has in their capital. It is the same as taking money out of your capital because there is no gain or further payout.

As a result, the SEBI has chosen to rename its current dividend scheme to “Income Distribution and Capital Withdrawal” (IDCW) in order to improve openness, minimize misunderstandings, and fully explain the differences. In mutual funds, IDCW has the same meaning as a dividend; the term change was made purely for clarification.

Benefits of IDCW in Mutual Funds

For instance, you can choose to get your investment returns from the dividend plan on a regular basis. Daily, monthly, quarterly, or annual dividend payments are all possible.

This IDCW payment must be delivered to unitholders within 15 days of the record date in accordance with SEBI’s (Mutual Funds Regulations, 1996) regulations. The most current change was made on November 9, 2021.

Additionally, the benefits of IDCW mutual funds will only be realized if the market is currently doing well. Selecting IDCW in mutual funds is a good choice if you’re a short-term investor. Conservative investors find an IDCW in a mutual fund more enticing for this reason.

However, it is impossible to dismiss the significance of IDCW’s tax advantages in mutual funds. When markets are at their highest point, the dividend choice performs best. The chance of the fund paying dividends increases as its NAV steadily increases. Moreover, the dividend option can be a good option for you if you want to be dependent upon your investments for a consistent source of income. Investors looking for a reliable income source who are approaching or have reached retirement age might consider this.

Drawbacks of IDCW in Mutual Funds

As a result of not receiving returns on returns, you lose out on the opportunity to profit from compounding. Furthermore, there are negative tax effects.

After the adjustments outlined in the Union Budget 2020–21, dividends or IDCW in mutual funds are subject to taxation at the unitholder’s hands depending on the applicable income tax slab rate. Regardless of how long you have been investing in the fund, if you are in the 30% tax band, you must pay tax at a rate of 30% on the IDCW amount.

Conclusion

The IDCW plans to simply distribute to you some of the capital that was previously yours, as the new name correctly implies. Even if you wish to use mutual funds to generate a regular income, it is preferable to invest in the growth option and take money out as needed rather than letting the mutual fund choose when you should do so. 

A feasible alternative to traditional products like fixed deposits or sovereign savings schemes might be investing in IDCW mutual fund schemes. The best IDCW programs in India are readily available, which makes it simple to access the programs. 

You can register for an account, add documents like your PAN and Aadhar Card, and explore the list of top-performing schemes. Be sure to carefully read the plan documentation before investing.