People invest in mutual funds to meet various goals through the potential returns generated by the fund. There are two ways of managing these returns – the first is the growth option, where returns are reinvested for compounding, and the second is the dividend option, now known as the Income Distribution cum Capital Withdrawal (IDCW) option, where the fund distributes surplus to investors periodically. This article will dive into the meaning of IDCW in mutual funds.
What is IDCW in MF or mutual funds?
IDCW options allow you to receive income distributions from the fund whenever the fund declares a payout.
Suppose you hold 1000 units of ABC mutual fund with a Net Asset Value (NAV) of Rs 10. If the fund declares a dividend of Rs 2 per unit, Rs 2000 will be distributed to you. After the payout, the fund’s NAV will reduce to Rs 8, reflecting the distribution. You retain the flexibility to redeem your units based on the updated portfolio value.
Why was the ‘Dividend’ option renamed to the ‘Income Distribution cum Capital Withdrawal’ option?
Learning the IDCW full form and IDCW meaning is essential for investors.
The Securities and Exchange Board of India (SEBI) renamed the ‘Dividend’ plan to ‘Income Distribution cum Capital Withdrawal’ via a notice dated April 1, 2021. The aim was to accurately reflect the nature of payouts in these plans, address any misconceptions, and promote transparency.
Many investors wrongly believed that mutual fund dividends were similar to the dividends declared by companies, which is not true. IDCW payouts are made from the fund’s distributable surplus, which may include earned income, realised capital gains, and, in some cases, a portion of the investor’s capital.
By changing the nomenclature, SEBI aimed to clarify that any IDCW payout will reduce the NAV of the scheme and is not an additional bonus over and above the scheme’s returns.
How are the IDCW options taxed?
Mutual fund schemes offer returns in two forms: IDCW payouts (formerly known as dividends) and capital gains.
IDCW is not a type of fund; rather, it is a payout option that is available for all categories of mutual funds. Therefore, the tax treatment of IDCW depends on the type of fund you choose.
While you may have to pay capital gains tax on redemption based on your fund type and holding period, regular IDCW payouts will also be subject to tax. The payout amount is added to your taxable income as ‘Income from Other Sources” and taxed as per your income slab. Additionally, Tax Deducted at Source (TDS) applies if the payout exceeds Rs 5000 in a financial year.
Should you opt for the IDCW option?
Whether an IDCW option is suitable for you depends on several factors, including your financial goals and risk tolerance level. If you wish to create a regular source of income, the IDCW option can be ideal owing to its periodic payouts. However, if you wish to harness compounding to create wealth in the long run, you may want to choose a growth plan, as the profits are reinvested in the fund.
The IDCW option is more suitable for conservative investors who prioritise liquidity and accessibility over capital appreciation. For instance, retirees who do not have a regular source of income may prefer an IDCW plan.
Conclusion
Understanding the IDCW meaning in MF and knowing what an IDCW payout means is essential for setting realistic investment expectations. This clarity, in turn, facilitates informed investment decisions and enhanced financial planning.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
