If regular cash flow from the mutual fund investment is what you’re looking for, IDCW plans can help. Read this post to know more.
From April 2021, the dividend plans in mutual funds were renamed as IDCW plans by SEBI to eliminate the confusion between dividends generated from stocks and mutual fund schemes.
Let’s try to understand IDCW in detail-
What is IDCW in a Mutual Fund?
The full form of IDCW is Income Distribution cum Capital Withdrawal. IDCW refers to the distribution of the income of a mutual fund generated from dividends and capital gains to the investors at intervals, making them ideal for generating a regular cash flow from the investment.
What are IDCW Plans?
While investing in a mutual fund scheme, growth and IDCW are two plan options available to investors. While the underlying portfolio of the scheme is the same between growth and IDCW plans, the difference lies in how the scheme uses the generated returns.
With the IDCW plan, investors can choose to receive some part of their investment at regular intervals. For instance, if you hold 1,000 units of a mutual fund scheme that has announced ₹1 IDCW, you’ll receive ₹1,000 as an IDCW. Growth plans, on the other hand, reinvest the returns to benefit the investors with the power of compounding.
Why Were Dividend Plans Renamed to IDCW Plans?
Dividends are commonly associated with equity investments. But in equity, companies generally declare dividends after retaining some of the generated profits for future growth. So, the dividend from stocks is over and above the capital appreciation. However, the concept is not the same with IDCW in mutual funds.
In mutual fund dividend plans, the dividends are paid from the accumulated profits. Once the dividend is paid, the NAV of the scheme is adjusted according to the payment made to the investors. So, the dividend here is not over and above the capital appreciation but a part of the investment made by the investor.
As the term 'dividends' made many investors believe that the dividends from the mutual fund scheme are similar to those paid by stocks, SEBI renamed these plans IDCW.
How Does IDCW Distribution Work in IDCW Plans?
As mentioned above, the NAV of the scheme is adjusted as and when the scheme pays a IDCW. Here’s how this works-
Mr Subhash holds 500 units of a mutual fund scheme (IDCW plan) with a current NAV of ₹100. The scheme announced a IDCW of ₹2 per unit. This is how IDCW distribution will work-
Total No. of Units |
500 |
NAV |
₹100 |
Investment Value |
₹50,000 |
IDCW Announced |
₹2 per unit |
IDCW Earned |
₹1,000 |
Adjusted NAV |
₹98 (₹100- ₹2) |
Investment Value After IDCW Payout |
₹49,000 |
As you can see, whenever the IDCW is paid, the NAV of the scheme is adjusted, and this impacts your investment value
3 Things Investors Should Know Before Choosing the IDCW Plan
Here are a few things you should know about IDCW plans-
Dividend Composition
It is commonly believed that IDCW plans make IDCW payouts from the IDCW the scheme receives from underlying stocks. However, this is not mandatory. It could also be a combination of IDCW payments from the stocks and the gains booked by selling portfolio holdings.
Dividend Payout
The IDCW payout from IDCW plans is at the discretion of the fund house/fund manager. No fixed amount is paid at regular intervals.
Dividend Taxation
The IDCW income received from IDCW plans is added to the taxable income of the investor and taxed as per their tax slab. If the IDCW is above ₹5,000 in a financial year, the fund house will also deduct TDS.
What Should You Choose Between IDCW and Growth Plans?
One of the most significant advantages of growth plans is compounding. Instead of paying the IDCW to the investors, the scheme reinvests the amount. So, the investors get to generate profits over already generated profits. This compounding can help investors with long-term wealth creation.
However, if you aim to receive some part of the investment at regular intervals, you can go with the IDCW plan. The scheme can also be ideal for investors from the NIL tax bracket as they won’t be required to pay tax on the IDCW.
Understanding IDCW Plans in Mutual Funds
If you’re new to mutual fund investments, knowing IDCW meaning is important as it is vital to making the right investment decision.
If you’re still confused between IDCW and growth plans or struggling to choose the right mutual fund scheme for your investment, consult a professional investment advisor.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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