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

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

Income Distribution cum Capital Withdrawal (IDCW): Learn IDCW Meaning, Options & How it Works
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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 is an investment plan offered by mutual funds. With IDCW, investors receive regular income from their investments. The full form of IDCW in Mutual Funds is Income Distribution cum Capital Withdrawal. 

Investors can make IDCW payments from a mutual fund’s NAV, even if the fund has no profits. This is because IDCW payments encompass both income and capital withdrawal, providing investors with a combined benefit from their investment.

How Does Income Distribution cum Capital Withdrawal Work?

Here is how Income Distribution cum Capital Withdrawal works in detail:

  • When a mutual fund earns profits, it can either reinvest those profits 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 on a monthly or quarterly basis.
  • Tax authorities tax IDCW payments as capital gains, subjecting them to a lower tax rate compared to 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: You can go for this if you’re looking for a regular income stream from your mutual fund investment. With regular IDCW, you can receive periodic income distributions at specific intervals, whether it’s 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 rather than immediate income, then Growth IDCW might be the way to go. In this type, instead of distributing the income 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.” 

You see, 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 are coming from!

List of Best IDCW Mutual Fund

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

Fund NameCategory1Y ReturnsFund Size (in Cr)
ICICI Prudential Dividend Yield FundEquity37.8%₹2,902
HDFC Dividend Yield FundEquity35.7%₹3,996
Templeton India Equity Income FundEquity29.1%₹1,706
Aditya Birla Sun Life Dividend Yield FundEquity36.3%₹1,114
Sundaram Dividend Yield FundEquity33.0%₹659
IDBI Dividend Yield FundEquity20.5%₹90
UTI Dividend Yield FundEquity31.6%₹3,281
LIC MF Dividend Yield FundEquity31.3%₹94
Tata Dividend Yield FundEquity35.8%₹640
SBI Dividend Yield FundEquityNA₹5,601
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 22nd December 2023.  However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!

3 Things Investors Should Know Before Choosing the IDCW Plan

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

  • Dividend Composition: Before opting for the IDCW in mutual funds, investors should thoroughly understand the dividend composition. 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: Investors 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 a crucial consideration for investors contemplating the IDCW plan. Effective financial planning requires understanding how taxes treat dividends from the plan. Investors should be aware of the applicable tax rates on dividends 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 a regular income from their investments may find IDCW plans to be a good option. IDCW payments can provide a steady stream of income, and the tax treatment is favourable for retirees.
  • People with Unpredictable Income: People who have 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 income, even if the investor’s 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, investors receive regular income without having to sell their units.

However, it is important to note that Income Distribution cum Capital Withdrawal plans are not right for everyone. Investors who are 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 stream of income.
  • Managing Cash Flow and Meeting Financial Obligations: IDCW mutual funds may allow you to better manage your cash flow. 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 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 adds stability to your investment journey.
  • Tax Advantages: Depending on the tax regulations in your country, IDCW may offer certain tax advantages. For instance, the government might tax dividend income at a lower rate compared to capital gains. It’s always wise to consult a tax advisor to understand the specific tax implications and benefits that might apply to your situation.

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 taxed as capital gains. This means that it is taxed at a lower rate than income, but it is still taxed. The tax rate depends on the holding period of the IDCW. If the IDCW is held for less than 3 years, it is taxed as short-term capital gains. If the IDCW is held for more than 3 years, it can be taxed as long-term capital gains.
  • TDS on IDCW: If the amount of IDCW distributed to an investor can be 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 will adjust against the final tax liability.
  • Exemptions from taxation: There are some exemptions from taxation on IDCW. For example, IDCWs received by senior citizens (above 60 years of age) are exempt from tax.

Apart from this, as an investor you can consider certain strategies to optimize tax efficiency in IDCW. These include choosing growth-oriented mutual fund schemes instead of dividend-oriented schemes, utilizing 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 main difference between dividends declared by companies and IDCW from mutual funds is that dividends declared by mutual funds are paid out of the company’s profits, while IDCW is paid out of the fund’s net asset value (NAV).

When a company declares a dividend, it is essentially giving back some of its profits to its shareholders. The company’s board of directors determines the dividend amount, and they usually pay 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 those profits 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 share of the profits.

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

FeatureDividends Declared by CompaniesIncome Distribution cum Capital Withdrawal from Mutual Funds
Source of paymentCompany’s profitsFund’s NAV
TaxationIncomeCapital gains
LiquidityTypically paid out in cashCan be redeemed for cash or reinvested in the fund
RiskGenerally considered to be a safe investmentConsidered to be a riskier investment
FrequencyTypically paid out quarterlyCan be paid out more or less frequently, depending on the fund
PredictabilityCan be more predictable, as companies typically have a set dividend policyLess 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 potentially aim to generate regular income for investors through dividends, which are then 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 back 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, if you are looking to grow your wealth over the long term, then a growth scheme might be a better option.

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

FeatureIncome Distribution cum Capital WithdrawalGrowth
Investment objectiveGenerate regular incomeGenerate long-term capital appreciation
Investment strategyInvests in a mix of equity and debt instrumentsInvests in a mix of equity and debt instruments
Risk profileLower riskHigher risk
Suitable forInvestors who are looking for a regular incomeInvestors who are looking to grow their wealth over the long term

IDCW in Mutual Funds – The Methodology 

Before understanding the methodology of IDCW, it is wise to recollect the IDCW meaning in mutual funds. Whenever an investor receives a dividend, it essentially represents a withdrawal of the investor’s capital, whether 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 Rs. 2,000 as an income distribution. It’s important to note that this amount represents a portion of the investor’s capital being returned, and it can be received in cash or reinvested in additional units of the mutual fund. The NAV of the mutual fund would typically decrease by the amount of the income distribution.

Things To Consider About IDCW in Mutual Fund

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

1. Misconception:

When mutual funds distribute dividends, they are essentially paid by the underlying stocks in the scheme 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.

2. Misconception:

Dividends received from mutual funds represent additional income on top of capital appreciation.

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. 

3. Misconception:

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

Reality:

The underlying mutual fund scheme portfolio remains the same for all options, be it growth or dividends. Profit booking by the fund manager occurs at the scheme level, applicable to all options. In the growth option, profits are reinvested and reflected in the NAV. The fund manager or AMC may distribute a portion of the profit to investors at their discretion in the IDCW cum dividend option. Investors must note that profit distribution under the dividend option is not obligatory for 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.

Income Distribution cum Capital Withdrawal 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

1. What does mutual funds IDCW mean?

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.

2. What is better growth or IDCW?

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 potentially 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.

3. What is IDCW reinvestment? 

IDCW reinvestment refers to the option of reinvesting the income distributions received from an IDCW plan back into the mutual fund. Instead of receiving the income in cash, investors can choose to reinvest it by purchasing additional units of the fund.

4. What is the dividend yield of Income Distribution cum Capital Withdrawal?

IDCW plans may not have a fixed dividend yield like traditional dividend plans. The income distributions in IDCW plans vary and depend on various factors such as the fund’s performance, market conditions, and the availability of distributable surplus.

5. What is IDCW interim?

IDCW interim meaning to the interim payments made by a mutual fund under the Income Distribution cum Capital Withdrawal (IDCW) plan.

6. What is IDCW payout in mutual funds? 

The IDCW payout meaning that you may receive the fund’s generated income (dividends and capital gains) and a portion of your invested capital at regular intervals.

7. What is the difference between IDCW payout vs growth? 

The main difference between IDCW payout vs growth options in mutual funds lies in how returns are distributed. IDCW pays out a portion of profits at regular intervals, like a salary, while growth reinvests all profits for potentially bigger future returns.

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