IDCW (Income Distribution cum Capital Withdrawal) refers to the distribution of a portion of both capital and profits to investors in the form of dividends. It essentially refunds a part of the invested capital, along with any accrued income. This blog explores the intricacies of IDCW plans, examining recent changes and their impact on dividend strategies. Additionally, it highlights how these modifications may affect your investment portfolio, offering insights into potential benefits and drawbacks. Understanding these implications is crucial for making informed decisions about the sustainability and growth of your investments.
What is IDCW (Dividend Plan) in mutual funds?
From 1 April 2021, SEBI renamed the dividend option in mutual funds as IDCW (Income Distribution cum Capital Withdrawal). Under this option, mutual fund schemes distribute a portion of their profits as dividends to investors at regular intervals. This provides investors with periodic returns from their investments.
In contrast, the growth option reinvests profits back into the scheme, increasing the NAV, without paying out dividends. Short-term capital gains tax on mutual funds is set at 15%, whereas IDCW is taxed at the highest bracket of 30%, excluding cess and surcharges for simplicity.
How does income distribution cum capital withdrawal work?
Income distribution cum capital withdrawal (IDCW) in mutual funds involves periodic payouts to investors, encompassing both the income generated and part of the invested capital.
Income distribution
Mutual funds generate income through dividends, interest, and capital gains. In IDCW, a portion of this income is distributed to investors at regular intervals.
Capital withdrawal
Apart from distributing income, IDCW also involves the return of a part of the investor’s capital. This means the principal amount invested is gradually reduced over time.
Impact on NAV
The Net Asset Value (NAV) of the mutual fund decreases with each IDCW payout. This reduction reflects the payout of both income and capital, impacting the investment’s overall value.
Tax implications
IDCW payouts may have different tax implications compared to growth options. Investors should consider the tax treatment of these distributions in their financial planning.
Suitability for investors
IDCW is suitable for those seeking regular income from their investments, such as retirees. It provides liquidity but may erode the principal over time, necessitating careful planning.
What is SEBI’s new rule on dividend plans?
SEBI has changed the name of the dividend option to IDCW option to make it more transparent and accurate. SEBI has also mandated that the IDCW option should clearly mention the source of distribution, by bifurcating income distribution I.e. appreciation of NAV or capital distribution or both. The dividend payouts maybe daily, weekly, monthly, quarterly, or annually.
Benefits of Income Distribution cum Capital Withdrawal (IDCW)
Income Distribution cum Capital Withdrawal (IDCW) in mutual funds presents numerous advantages for investors:
- Providing regular income: IDCW allows investors to receive consistent income distributions from their mutual fund holdings, akin to receiving a paycheck from investments. This steady income can assist in covering daily expenses or enjoying a reliable source of funds.
- Facilitating cash flow management: Investing in IDCW mutual funds can aid in managing cash flow effectively. Regular income distributions enable investors to meet ongoing expenses, fulfill loan obligations, or plan for retirement income with greater ease.
- Balancing income and capital appreciation goals: IDCW strikes a harmonious balance between generating income and potentially increasing investment value. Investors can enjoy periodic income while retaining the potential for their investment to appreciate over time.
- Enhancing diversification and risk management: Mutual funds typically diversify their holdings across various securities, mitigating risk. Opting for IDCW allows investors to benefit from this diversification while receiving consistent income, thereby adding stability to their investment portfolios.
- Leveraging tax benefits: Depending on the tax laws in their jurisdiction, investors may enjoy tax advantages with IDCW. For example, dividend income might be taxed at a lower rate compared to capital gains. Consulting a tax advisor is recommended to comprehend the specific tax implications and benefits applicable to individual circumstances.
Types of IDCW in Mutual Funds
Regular IDCW
Regular IDCW (Income Distribution cum Capital Withdrawal) involves periodic payouts to investors, typically on a monthly, quarterly, or annual basis. These distributions consist of the income generated by the mutual fund’s investments and a portion of the invested capital. Regular IDCW is suitable for investors seeking a steady stream of income to meet recurring expenses. However, the NAV of the fund decreases with each payout, reducing the overall value of the investment over time.
Special IDCW
Special IDCW is distributed on an ad-hoc basis, usually triggered by significant gains or events such as a substantial profit from an investment or windfall income. Unlike regular IDCW, special IDCW does not follow a fixed schedule and is often announced by the fund manager when there are surplus earnings to distribute. This type of IDCW can provide investors with additional income in unexpected periods, offering a bonus on top of the regular income distributions.
Who should invest in IDCW schemes?
Here are some individuals who may find investing in Income Distribution cum Capital Withdrawal (IDCW) plans advantageous:
Retirees: Retirees seeking a consistent income from their investments may benefit from IDCW plans. These payments can offer a reliable source of income, with favourable tax treatment for retirees.
Individuals with irregular income: Those with unpredictable earnings, such as freelancers or self-employed individuals, might find IDCW plans appealing. The steady income from Income Distribution cum Capital Withdrawal payments can help stabilize finances amidst fluctuating income.
Investors seeking convenience: IDCW plans could suit individuals who prefer to avoid the complexities of selling units from their mutual fund holdings. By opting for IDCW, investors receive regular income without the need to liquidate their units.
However, it's essential to recognise that IDCW plans may not be suitable for everyone. Investors aiming for long-term wealth growth might find growth-oriented mutual funds more appropriate.
Taxation of IDCW schemes in mutual funds
Until 2020, companies were obligated to pay a dividend distribution tax of 15% on declared dividends. However, following the 2020 budget, the dividend distribution tax levied on companies was eliminated, shifting the tax burden to shareholders' hands.
Consequently, any distributed income under Income Distribution cum Capital Withdrawal (IDCW) plans is subject to taxation based on the investor's applicable slab rate. Additionally, Asset Management Companies (AMCs) will deduct TDS if the dividend exceeds Rs. 5,000 per fiscal year. No TDS deduction will occur if the dividend income is up to Rs. 5,000.
Some common misconceptions about IDCW
Sr. no |
Misconception |
Reality |
1 |
Some investors believe that dividends paid by mutual funds originate solely from the stocks in the fund's portfolio. |
Dividends from mutual fund schemes can include proceeds from underlying stocks, but may also involve gains from stock sales. It is not exclusively reliant on direct dividends from portfolio stocks. |
2 |
There is a notion that mutual fund dividends are additional earnings on top of capital gains. |
Dividends received from mutual funds are not extra income; they are gains paid from invested capital. When dividends are declared, the NAV of the fund decreases by the same amount. |
3 |
Some think that mutual funds with dividend options regularly realise profits to pay dividends. |
Dividend payment is not obligatory for any mutual fund scheme; it is at the discretion of the fund manager. Whether growth or dividend option is chosen, the portfolio remains unchanged, and profits affect the entire fund. Under the growth option, profits are reinvested, while in the dividend option, profits may be distributed to investors but are not mandatory. |
How to calculate IDCW with an example
The formula for calculating IDCW is (Total dividend received = number of units x Dividend per unit). To illustrate this, consider a shareholder with 1,000 units in a mutual fund scheme with an NAV of Rs. 100. If the scheme declares a dividend of Rs. 5 per unit, the investor's investment value would not receive an additional dividend but would be funded solely from their initial investment. Opting for the growth option of the mutual fund program would result in an investment of Rs. 1,00,000 instead of Rs. 95,000, as no dividend payments are made under this option. This change from "dividend" to IDCW was implemented by SEBI to enhance investor decision-making in mutual fund investments.
Why did SEBI rename “Dividend Plan” as “IDCW” plan?
SEBI renamed the dividend option as IDCW option to avoid some common misconceptions among investors about mutual fund dividends. Some of these misconceptions are:
- Mutual fund dividends are extra income over and above the capital appreciation.
- Mutual fund dividends are guaranteed and regular.
- Mutual fund dividends are similar to company dividends.
SEBI wanted to clarify that mutual fund dividends are not extra income or return, but a part of your own investment that is returned to you. When a mutual fund scheme pays a dividend, its NAV drops by the same amount, reducing your investment value. Mutual fund dividends are also not guaranteed or regular, as they depend on the performance and discretion of the scheme. Mutual fund dividends are also different from company dividends, as they may include capital gains as well as income from securities.
IDCW in mutual funds - The methodology
To understand how IDCW works in mutual funds, let us take an example. Suppose you invest Rs. 10,000 in an equity mutual fund scheme with an NAV of Rs. 100 under the IDCW option. You will get 100 units of the scheme. After six months, the scheme declares a dividend of Rs. 5 per unit from its capital gains. You will receive Rs. 500 as dividend (100 units x Rs. 5 per unit). The NAV of the scheme will drop to Rs. 95 (on the date of declaration) after paying the dividend. Your investment value will remain Rs. 9,500 (100 units x Rs. 95 per unit).
Just for reference, if you had invested in the same scheme under the growth option, you would not receive any dividend. However, your NAV would be higher than Rs. 95, as it would reflect the capital gains made by the scheme. Your investment value would be higher than Rs. 9,500.
IDCW Mutual Funds List
Here is a table showcasing the best IDCW mutual funds:
Scheme Name |
AMC Name |
Launch Date |
DSP Flexi Cap Reg IDCW |
DSPMF |
29-04-1997 |
Motilal Oswal Flexi Cap Fund Reg IDCW |
MotilalMF |
28-04-2014 |
Axis Flexi Cap Reg IDCW |
AxisMF |
13-11-2017 |
HDFC Flexi Cap IDCW |
HDFCMF |
01-01-1995 |
ABSL Flexi Cap IDCW Reg |
ABSLMF |
27-08-1998 |
PGIM India Flexi Cap Reg IDCW |
PGIMIndiaMF |
25-02-2015 |
HSBC Flexi Cap IDCW |
HSBCMF |
24-02-2004 |
Franklin India Flexi Cap IDCW |
FranklinMF |
29-09-1994 |
Canara Robeco Flexi Cap Reg IDCW |
CanaraMF |
16-09-2003 |
Things investors should know before choosing the IDCW plan
Impact on investment value
Before choosing the IDCW (Income Distribution cum Capital Withdrawal) plan, investors should understand its impact on their investment value. Each IDCW payout includes both the income generated by the mutual fund and a portion of the invested capital. Consequently, the Net Asset Value (NAV) of the fund decreases with every distribution, gradually reducing the principal amount invested. Investors must consider whether they are comfortable with this erosion of capital over time and how it aligns with their financial goals.
Tax implications
IDCW payouts have distinct tax implications compared to other mutual fund plans. In some regions, the income portion of the distribution may be subject to income tax, while the capital withdrawal might have different tax treatments. It is crucial for investors to understand the tax regulations applicable in their jurisdiction and how IDCW distributions will affect their overall tax liability. Consulting a financial advisor or tax professional can provide clarity and help in making an informed decision.
Suitability for financial goals
Investors should assess whether the IDCW plan aligns with their financial objectives. IDCW is particularly suitable for those needing regular income, such as retirees or individuals relying on investment income to cover living expenses. However, the potential reduction in capital means that it might not be ideal for long-term wealth accumulation. Evaluating personal financial needs, risk tolerance, and investment horizon is essential in determining if IDCW is the appropriate choice for one’s portfolio.
Difference between dividend declared by companies and IDCW from mutual funds
Dividends declared by companies represent a portion of their profits distributed to shareholders as a reward for their investment. These dividends are typically paid out of the company's earnings, and the amount can vary depending on the company’s performance and profit levels. Shareholders receive dividends on a per-share basis, and the value of their shares remains unaffected by the dividend payout.
In contrast, IDCW (Income Distribution cum Capital Withdrawal) from mutual funds involves distributing a portion of both the capital and profits of the fund to its investors. Unlike company dividends, IDCW is not purely profit-based, as it may also include part of the invested capital. This withdrawal option reduces the Net Asset Value (NAV) of the mutual fund, impacting the overall investment value. Additionally, IDCW is taxed at the investor’s highest tax bracket, making it different in both structure and taxation from company dividends.
Conclusion
IDCW is the new name for the dividend option in mutual funds. It stands for Income Distribution cum Capital Withdrawal and indicates that dividends are paid from your own investment value. IDCW plans may suit investors who need regular income and are in a lower tax bracket. Growth plans may suit investors who want to benefit from compounding and long-term wealth creation and are in a higher tax bracket. You should choose the option that matches your investment objective, risk profile, time horizon, and tax implications.
