IDCW in Mutual Fund - Guide to Income Distribution cum Capital Withdrawal Plan

If you are someone seeking both regular income and capital appreciation in one mutual fund, the IDCW in mutual fund is for you. The IDCW Plan, or Income Distribution cum Capital Withdrawal plan, is a way to dive into mutual funds at a moderate risk. 

In this article, we will share what an IDCW plan is, its risks, benefits, and why it is a good investment option.  

What is IDCW in Mutual Fund?

IDCW in mutual funds means Income Distribution cum Capital Withdrawal. It is a type of investment plan offered by mutual funds where investors can get a regular income from their investments. This plan allows investors to gain a combined benefit from both income distribution and capital withdrawal. 

The good part about this plan is that investors can receive IDCW payments even when the fund doesn’t make profits. It’s because IDCW payments encompass income and capital withdrawal, allowing investors to gain consistent returns. Hence, this is a good option for those seeking a steady income without needing to liquidate their holdings. 

How Does Income Distribution cum Capital Withdrawal Work?

Here is how the Income Distribution cum Capital Withdrawal works in mutual funds:

• Profit Distribution: When a fund earns profits, it can choose to either reinvest them back into the fund or distribute them to its investors.
• Issuing IDCWs: If a fund distributes the profits, it makes it happen by issuing IDCWs to its investors. Essentially, IDCWs are the fund units that represent the investor’s share of profits.
• Determining Amount: The fund’s Net Asset Value (NAV) and the investor’s holding period determines how much amount of IDCW an investor will receive.
• Regular Payouts: The IDCW payouts are made on a regular basis, such as monthly or quarterly.
• Taxation: IDCW are taxed as capital gains by the tax authorities, usually at a lower rate than regular income. Thus, making IDCW a tax-efficient way of earning income.

Types of IDCW in Mutual Funds

There are two main types of IDCW in mutual funds. Let’s understand what they are. 

• Regular IDCW: This option is ideal for those seeking a regular income from their mutual fund investments. With regular IDCWs, you can receive periodic income distributions on a monthly, quarterly, or annual basis. This type of IDCW is great for retirees or those needing a constant flow of income.
• Growth IDCW: It’s suitable for those wanting long-term capital growth rather than a quick income source. So, instead of distributing the profits generated, the fund reinvests it into the scheme to grow. This type of IDCW aims to maximize capital appreciation over time, which is good for long-term wealth creation.

What is SEBI’s New Rule on Dividend Plans?

SEBI has renamed the Dividend Plan to the Income Distribution cum Capital Withdrawal (IDCW) Plan. This change came into effect in April 2021 to avoid confusion caused by the term “dividend”. 

Since mutual funds are usually perceived as being paid from the company's profits, there was a confusion surrounding it. However, IDCWs are paid from the fund’s NAV regardless of whether the fund made profits or not. In addition, the IDCW Plan combines both income distribution and capital withdrawal. Thus, offering clarity to investors. 

Things Investors Should Know Before Investing into the IDCW Plan

There are three things that investors should know before they invest into the IDCW Plan, which include:

• Dividend Composition - It’s crucial to understand the dividend composition before opting for the IDCW in mutual funds. Start with examining the sources of dividend payments, such as profits generated by the mutual fund, interest income, or any other income. It can tell you the sustainability and reliability of the income distributions. 
• Dividend Payout - You should also know the dividend payout mechanism associated with the IDCW Plan. Understand the frequency of the dividend payouts, such as whether they are paid monthly, quarterly, or annually. It will help you determine the cash flow and plan your finances.
• Dividend Taxation - Tax implications can be a crucial aspect for investors thinking of the IDCW Plan. You should be aware of the applicable tax rates on dividends received and whether any exemptions are available.

Who Should Invest in Income Distribution cum Capital Withdrawal (IDCW)?

Here are some of the people who might benefit by investing into the Income Distribution cum Capital Withdrawal (IDCW) plan:

• Retirees - Retired people who need regular income may find IDFC plans a good option for them. Since IDCW payments can be a steady income source and the taxes are favorable, it’s suitable to meet daily expenses without needing to sell investments.
• People With Unpredictable Income - Individuals with unpredictable income, such as freelancers or self-employed individuals, may also find IDCW a great addition. It is a stable source of income, even if their income flow fluctuates.
• Investors Who Want To Avoid Selling Units - IDCW Plans can also be suitable for those who don’t want to sell units from their mutual funds portfolio. With this plan, you can receive a regular income without needing to sell your fund units. 

However, it would be great to note that the IDCW plan may not be suitable for everyone. Investors looking to grow their wealth in the long-term may be better off with a growth-oriented mutual fund. 

Benefits of Income Distribution cum Capital Withdrawal (IDCW)

Investing in Income Distribution cum Capital Withdrawal (IDCW) can offer many benefits to the investors, including:

1. Generates Regular Income: By investing in IDCW, you can get a regular income which can help with your day-to-day expenses. 

2. Manage Cash Flow: The regular income from IDCW investments may help you manage cash flow better. You can plan different financial goals with the extra income. 

3. Capital Appreciation: While getting your regular income, IDCW also allows your investment to potentially grow. So, it can increase over time. 

4. Diversification: Mutual funds usually invest in a range of securities which diversify the risk. So, you can enjoy a stable income with minimal risk. 

5. Tax Advantages: IDCWs are subject to only capital gains tax, which are lower than the regular income tax rate. 

Taxation of Income Distribution cum Capital Withdrawal in Mutual Funds

There are three taxation aspects of Income Distribution cum Capital Withdrawal (IDCW) in mutual funds. Here are all of them explained:

Taxation of IDCW

IDCW is subject to capital gains tax, even though it’s relatively lower than the tax rate on income tax. The tax rate may vary depending on how long the IDCW is held. If the tenure is less than three years, it’s taxed as short-term capital gains. If IDCW is held for longer than that, it is taxed as long-term capital gains. 

TDS on IDCW

If the amount of IDCW distributed to an investor exceeds Rs. 5,000 in a financial year, the fund house will deduct TDS at a rate of 10%. Consequently, the TDS will get credited to your income tax account and adjusted against the final tax liability.

Exemptions from Taxation

While IDCWs are taxable, some IDCWs may be an exception. For instance, the IDCWs received by senior citizens (above 60 years of age) are exempt from tax.

Difference Between Dividends Declared by Companies VS IDCW from Mutual Funds

There is only one key differentiation between dividends declared by companies and IDCW from mutual funds, and that is, dividends declared by companies are paid out of the company’s profits, whereas IDCW from mutual funds are paid from the fund’s NAV.

When a company declares a dividend, it shares a part of the profits with its shareholders. The company’s board of directors determines the dividend amount and typically pays it out quarterly. This approach ensures that the shareholders get a part out of the company’s earnings. 

On the other hand, the Income Distribution cum Capital Withdrawal (IDCW) works the other way around. When a mutual fund earns profits, it can either choose to reinvest them into the fund or distribute them to its investors. 

If the fund chooses the latter, it does so by issuing IDCWs to its investors. In short, IDCWs are fund’s units representing an investor’s share of the profits. So, it means that the payments can come from the NAV, or net asset value of the fund. 

Which Mutual Fund Scheme is Better: Growth or IDCW?

Growth and IDCW are both types of mutual fund schemes, however, they work with different investment objectives and strategies. 

For instance, IDCW schemes invest into a mix of equity and debt-related investments. They aim to generate regular income for its investors by reinvesting into the scheme to grow the investor’s corpus. 

However, growth schemes also invest in a mix of equity and debt instruments. The only difference is that they reinvest the profits into the scheme to generate long-term appreciation for the investors. 

So, the most suitable type of mutual fund actually depends on your investment objectives and risk tolerance. While IDCW may be a good option for someone seeking a regular income, a growth scheme is recommended for wealth creation in the long run. 

You can look into their key differences in the table below and then make your judgment:

Conclusion

In conclusion, Income Distribution cum Capital Withdrawal (IDCW) in mutual funds can provide you with a stable cash flow while also allowing for capital withdrawal. This balanced approach can help you meet both your income distribution and capital appreciation goals. 

However, it’s equally crucial to keep the risks in mind and choose the best IDCW plan wisely. 

FAQs

1. What is IDCW investment?

IDCW investment means reinvesting the income distributions received from an IDCW Plan into the mutual fund. 

2. What is IDCW payout in mutual funds?

An IDCW payout means that you can receive regular payments, which can include both the capital gains and a portion of investment capital combined. 

3. What is the IDCW interim?

The IDCW interim refers to the interim payments made by the mutual fund under the Income Distribution cum Capital Withdrawal (IDCW) Plan.