Income Distribution cum Capital Withdrawal (IDCW): Learn IDCW Meaning, Options & How it Works

Investing in mutual funds can be a good investment option for individuals seeking regular income from their investments. Mutual funds offer IDCW, a unique plan enabling investors to receive regular income, irrespective of the fund’s profit generation. In this blog, we will explore the nuances of IDCW, including IDCW meaning, benefits, tax implications, and strategies for optimizing its potential.

What is IDCW in Mutual Funds?

IDCW means in mutual funds is an investment plan offered by mutual funds. The full form of IDCW in Mutual Funds is Income Distribution cum Capital Withdrawal. With IDCW, investors receive regular income from their investments.

Investors can make 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, providing investors with a combined benefit from their investment.

How Does Income Distribution cum Capital Withdrawal Work?

Now that we have covered IDCW meaning in MF, here is how Income Distribution cum Capital Withdrawal works.

• 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 essentially units of the fund that represent the investor’s shares of the profits.
• The fund’s NAV and the investor’s holding period determine the amount of Income Distribution cum Capital Withdrawal received by the investor.
• One can make IDCW payouts regularly, like monthly or quarterly.
• Tax authorities tax IDCW payments as capital gains, subjecting them to a lower tax rate than income, although they still incur taxation.

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 MF.

• Regular IDCW: This is a great option if you’re 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.
• Growth IDCW: If you’re more focused on long-term capital growth 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 maximize capital appreciation over time, potentially leading to good returns in the future.

What is SEBI’s New Rule on Dividend Plans?

SEBI has renamed the Dividend Plan to the Income Distribution cum Capital Withdrawal Plan. This change came into effect in April 2021.

Why did SEBI Eename 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 paid from a company’s profits, but IDCWs can be paid out of a mutual fund’s NAV, even if the fund didn’t make any profits. So, to make things clearer for investors, the IDCW Plan combines income distribution and capital withdrawal. It’s all about ensuring transparency and understanding where your returns come from!

List of Best IDCW Mutual Funds in India 2024

Here is the list of best Income Distribution cum Capital Withdrawal Mutual Funds:

Fund Name	Sub-Category	Fund Size (in Cr)	NAV	3Y CAGR	5Y CAGR
ICICI Pru Overnight Fund	Overnight Fund	₹7,030.25	1,000.35	115.44	58.49
Quant Small Cap Fund	Small Cap Fund	₹17,348.96	203.66	41.28	37.68
Quant Infrastructure Fund	Sectoral Fund - Infrastructure	₹2,207.59	42.83	42.22	36.56
Quant ELSS Tax Saver Fund	Equity Linked Savings Scheme	₹7,769.92	54.09	32.91	33.26
Quant Mid Cap Fund	Mid Cap Fund	₹5,421.74	84.53	37.44	32.43
Quant Active Fund	Multi Cap Fund	₹8,731.92	80.11	28.43	29.80
Quant Multi Asset Fund	Multi Asset Allocation Fund	₹1,829.08	124.13	31.08	29.77
Tata Small Cap Fund	Small Cap Fund	₹6,236.38	37.50	32.99	28.26
Quant Large & Mid Cap Fund	Large & Mid Cap Fund	₹1,884.0	57.65	31.92	26.80
PGIM India Midcap Opp Fund	Mid Cap Fund	₹9,923.95	51.59	22.00	26.21

Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.

Note: The data on the top IDCW Mutual Funds in India in the list is from 16th April, 2024.  However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!

Top IDCW Mutual Funds in India 2024: Overview

Here is a list of India’s top IDCW mutual funds in 2024.

ICICI Pru Overnight Fund

ICICI Prudential Overnight Fund Direct-Growth is an Overnight mutual fund scheme offered by ICICI Prudential Mutual Fund in November 2018. It is a medium-sized fund with an expense ratio of 0.1%.

Quant Small Cap Fund

Quant Small Cap Fund Direct Plan IDCW is an Equity Mutual Fund scheme launched by Quant Mutual Fund in April 1998. It is a medium-sized fund with an expense ratio of 0.7%. 

Quant Infrastructure Fund

Quant Infrastructure Fund (IDCW) is an Equity Mutual Fund scheme launched by Quant Mutual Fund in April 1996. It is a medium-sized fund with an expense ratio of 0.73%. 

Quant ELSS Tax Saver Fund

Quant ELSS Tax Saver Fund is an ELSS mutual fund scheme launched by Quant Mutual Fund in April 1996. It is a medium-sized fund with an expense ratio of 0.76%. 

 Quant Mid Cap Fund

Quant Mid Cap Fund Direct-IDCW Monthly is an Equity mutual fund scheme from Quant Mutual Fund. This scheme was launched in April 1996 and with an expense ratio of 32.43%

Quant Active Fund

Quant Active Fund Direct-Growth is a Multi-Cap mutual fund scheme from Quant Mutual Fund. It was launched in January 2024 and is a medium-sized fund with an expense ratio of 0.71%.

Quant Multi Asset Fund

Quant Multi Asset Fund Direct is a Hybrid Mutual Fund scheme launched by Quant Mutual Fund. It was made available to investors in April 1996. It is a medium-sized fund with an expense ratio of 0.76%.

Tata Small Cap Fund

Tata Small Cap Fund Direct IDCW is an Equity mutual Fund scheme launched by Tata Mutual Fund. It was made available to investors in June 1995. It is a medium-sized fund with an expense ratio of 0.29%.

Quant Large & Mid Cap Fund

Quant Large & Mid Cap Fund Direct IDCW is an Equity Mutual Fund scheme launched by Quant Mutual Fund. The scheme was made available to investors in April 1996. It is a medium-sized fund with an expense ratio of 0.75%.

PGIM India Midcap Opp Fund

PGIM India Midcap Opportunities Fund Direct-Growth is a mid-cap mutual fund scheme from PGIM India Mutual Fund. It was launched in November 2013 and is a medium-sized fund with an expense ratio of 0.75%.

3 Things Investors Should Know Before Choosing the IDCW Plan

Let’s look at three factors that you must consider before choosing the IDWC 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.

• Dividend Payout: One must be aware of the dividend payout mechanism associated with the IDCW plan. Understanding the frequency of dividend distributions involves determining whether companies pay them monthly, quarterly, or annually.

• 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. Investors should know the applicable tax rates on dividends received and whether any exemptions or deductions are available.

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 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.
• People with Unpredictable Income: People with unpredictable income, such as freelancers or self-employed individuals, may also find an IDCW suitable. Income Distribution cum Capital Withdrawal payments can provide a regular stream of revenue, even if the income fluctuates.
• For People Who Want to Avoid the Hassle of Selling Units: IDCW plans can be a suitable option for people 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.

However, it is important to note that Income Distribution cum Capital Withdrawal plans are not suitable for everyone. Investors looking to grow their wealth over the long term may 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 enjoy 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 MF 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 optimize 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.

However, the Income Distribution cum Capital Withdrawal works in a slightly different way. 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.

There are a few key differences between dividends declared by companies and IDCW from mutual funds:

Feature	Dividends Declared by Companies	Income Distribution cum Capital Withdrawal from Mutual Funds
Source of payment	Company’s profits	Fund’s NAV
Taxation	Income	Capital gains
Liquidity	Typically paid out in cash	Can be redeemed for cash or reinvested in the fund
Risk	Generally considered to be a safe investment	Considered to be a riskier investment
Frequency	Typically paid out quarterly	Can be paid out more or less frequently, depending on the fund
Predictability	Can be more predictable, as companies typically have a set dividend policy	Less predictable, as the fund’s NAV can fluctuate

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.

As we know, Income Distribution cum Capital Withdrawal schemes invest in a mix of equity and debt instruments. They aim to generate regular income for investors through dividends, 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 Income Distribution cum Capital Withdrawal 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.

Here is a table comparing the two types of mutual fund schemes – Growth vs IDCW Interim

Feature	Income Distribution cum Capital Withdrawal	Growth
Investment objective	Generate regular income	Generate long-term capital appreciation
Investment strategy	Invests in a mix of equity and debt instruments	Invests in a mix of equity and debt instruments
Risk profile	Lower risk	Higher risk
Suitable for	Investors who are looking for a regular income	Investors who are looking to grow their wealth over the long term

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
NAV before dividend payout	10
Investment Value	1000
Dividend per unit	1
Total dividend received (units X dividend per unit)	100
NAV after dividend payout	9
Investment value after dividend payout	900

Common Misconceptions about IDCW in Mutual Funds

Let’s look at the important considerations before investing in IDCW in mutual funds.

(a) Misconception:

When mutual funds distribute dividends, the funds are primarily disbursed using income generated from the underlying stocks within the scheme’s portfolio.

Reality: 

Mutual fund dividends can pay dividends from the underlying stocks in the portfolio, as well as profits generated from selling stocks within the portfolio.

(b) Misconception:

Dividend option mutual fund schemes regularly book profits to pay dividends to investors.

Reality:

Dividends from mutual funds do not represent extra income beyond the profits gained upon redemption. Instead, they can be in the form of capital appreciation, sourced from the investor’s capital. 

(c) Misconception:

Dividend option mutual fund schemes regularly book profits to pay dividends to investors.

Reality:

The mutual fund scheme’s portfolio 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’s important for investors to understand that profit distribution in the dividend option is not guaranteed by the AMC.

To Wrap It Up…

Income Distribution cum Capital Withdrawal in mutual funds provides investors 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.

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