The full form of IDCW is Income Distribution cum Capital Withdrawal. This term came into existence in 2021 when SEBI, the regulator for the securities market in India, renamed the dividend option in mutual funds to IDCW. This was done to avoid the misconception that dividends distributed by mutual funds were a surplus when in reality, they were part of the investor’s capital.
What Is IDCW In Mutual Fund?
In a mutual fund, IDCW refers to the earnings derived from the scheme’s investments, which are distributed to investors. It can be considered as a portion of the profits earned by the fund, which is paid out to the investor. The investor can receive this distribution or reinvest it in the fund.
For instance, if a mutual fund has earned significant profits on its investments, it might distribute ₹10 per unit as IDCW. If investors hold 1,000 units, they will receive ₹10,000 as IDCW.
How IDCW Works?
IDCW works by distributing the earnings of a mutual fund to its investors. The amount an investor receives depends on the number of units they hold and the per-unit distribution decided by the fund.
Let’s consider an investor who possesses 2,000 units of an ETF. The current NAV (cum IDCW) of this scheme is Rs 150. If the scheme announces an IDCW of Rs 7 per unit, the impact on the investor’s investment value can be demonstrated as follows –
|Number of Units||2,000|
|NAV (cum IDCW)||Rs 150|
|Investment Value||Rs 300,000|
|IDCW per unit||Rs 7|
|Total IDCW received (no. of units x IDCW per unit)||Rs 14,000|
|Ex-IDCW NAV||Rs 143|
|Investment Value after IDCW payout||Rs 286,000|
From the above, it’s clear that the IDCW received by the investor is not extra; it is deducted from the total investment value. If the investor had opted for the growth option of the ETF scheme, the value of the investment would have remained at Rs 300,000 instead of Rs 286,000. This is because in the growth option, there’s no IDCW distribution.
This is why SEBI renamed ‘dividend’ to IDCW (Income Distributed & Capital Withdrawn) in mutual funds and ETFs. This name change helps to clarify that the distributed income is withdrawn from the investor’s capital, thus aiding in more informed investment decisions for those opting for the IDCW option.
The IDCW payout refers to the actual process of transferring the IDCW amount to the investors. This payout can occur on a regular schedule, such as monthly, quarterly, half-yearly, or annually, based on the type of the fund.
For example, a debt mutual fund might offer monthly IDCW payouts, while an equity fund might do so annually. The payout is directly credited to the investor’s bank account linked with the mutual fund investment.
Growth Vs IDCW
The primary difference between the growth and IDCW options in mutual funds is that in the growth option, all profits are put back into the fund and the Net Asset Value (NAV) of the fund goes up over time. On the other hand, the IDCW option gives profits to investors on a regular basis, which lowers the NAV of the fund units. This option suits those seeking regular income from their investments.
|Parameters||Growth Option||IDCW Option|
|Taxation||Capital gains tax applicable upon redemption||Dividend Distribution Tax (DDT) applicable on distributed income|
|Cash Flow||No immediate cash flow, as earnings are reinvested||Provides regular income to meet financial needs|
|Reinvestment Potential||Offers potential for higher returns over the long term||Provides a stable and predictable income stream|
|Investor Risk Preference||Suited for investors seeking capital appreciation and willing to forgo immediate income||Suited for investors who prioritize regular income and may be willing to compromise on potential growth|
|Portfolio Monitoring||Investors need to track capital gains for taxation purposes||Investors receive regular income statements reflecting payouts and tax liability|
|Compounding Effect||Compound growth over time can lead to substantial wealth creation||Regular income can help meet ongoing expenses and financial goals|
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What Is IDCW In Mutual Fund – Quick Summary
- IDCW stands for Income Distribution cum Capital Withdrawal, a term introduced by SEBI in 2021 to replace ‘dividend’ in mutual funds.
- IDCW in a mutual fund refers to the profits the scheme generates, which are distributed to its investors based on the number of units they hold.
- IDCW works by providing these distributed earnings to investors. After the distribution, the NAV of the mutual fund decreases by the same amount per unit.
- IDCW payout refers to the actual transfer of the IDCW amount to investors, which can occur on a regular schedule such as monthly, quarterly, half-yearly, or annually, depending on the type of the fund.
- The main difference between growth and IDCW options lies in their payout strategies. Growth options reinvest all profits back into the fund, aiming for long-term capital appreciation. In contrast, IDCW options distribute a portion of the profits to investors, offering a regular income stream.
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IDCW Full Form – FAQs
1.What Is IDCW In Mutual Fund?
IDCW, or Income Distribution cum Capital Withdrawal, in a mutual fund, is a part of the fund’s earnings that are distributed to the investors.
2.What Is Better Growth Or IDCW?
The choice between growth and IDCW depends on an investor’s financial goals. If they seek capital appreciation over the long term, the growth option would be more suitable. If they prefer regular income, they may opt for IDCW.
3.What Is The Benefit Of IDCW Mutual Fund?
IDCW mutual funds provide regular income to investors, which can benefit those seeking a steady cash flow, such as retirees.
4.Is Idcw Taxable In India?
Yes, IDCW is taxable in India. The taxation depends on the type of mutual fund (equity or debt) and the holding period.
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