IDCW in Mutual Funds: Explore Meaning, Mechanism and Benefits

Are you an equity mutual fund investor? Looking for a scheme that offers regular payouts instead of making you wait for long-term capital appreciation? Then choosing the IDCW option over the Growth plan could be a smart choice. 

Continue reading this blog to explore what IDCW in mutual funds means, how it works, and who should consider it.

Quick Overview 

• Funds like DSP Flexi Cap Reg IDCW have an 8.68% 3-Year dividend yield track record.
• IDCW decreases the NAV. If the NAV is ₹20 and the dividend per unit is ₹2, the post-distribution NAV will drop to ₹18.
• IDCW payouts are taxable and can go up to the highest bracket of 30%.

What is IDCW in Mutual Funds? 

IDCW, which stands for Income Distribution cum Capital Withdrawal, refers to a mechanism where investors receive profits periodically from their mutual fund investments. These payouts are known as dividends, which come from the scheme’s profits of its fund house. 

Upon choosing the IDCW option at the time of mutual fund selection, the amount is directly credited to the investor’s bank account, making it a convenient way to generate passive income.

However, IDCW reduces the Net Asset Value (NAV) of the fund, since the distributed amount is deducted from the scheme’s overall value.

How Does IDCW Work?

Suppose you opt for an IDCW mutual fund scheme. If you hold 1000 units with a NAV of ₹20 and the mutual fund house declares a dividend of ₹2 per unit, see the following to know your dividend payout.

It is easy to understand that you do not receive any extra payment by choosing the IDCW option. It is actually a withdrawal of capital, not withdrawing extra income. 

That is why the term ‘dividend’ was replaced with IDCW in mutual funds by SEBI in April 2021. It helps investors to understand the actual nature of these payouts and take informed decisions.

Benefits of IDCW in Mutual Funds 

• Ensures a Passive Income: When you opt for IDCW, you ensure a potential source of regular income. That is why senior citizens, retirees or individuals with fluctuating income prefer this option when choosing a mutual fund scheme. 
• Gain Cash Flow Stability: Since IDCW payouts provide a regular cash flow, most investors prefer this option to bear their regular expenses. It offers a sense of security and helps them maintain their lifestyle with convenience.
• Diversify Income: By choosing IDCW in mutual funds, investors diversify their sources of income. This way, they are not solely dependent on their monthly salary or property rent to bear their everyday expenses and other financial needs. 
• Enjoy Tax Benefits: With IDCW, investors may gain some tax benefits, as payouts are taxed at a lower rate than capital gains. For investors belonging to the lower income brackets, this can be more tax-friendly compared to higher-earning investors.

Factors to Consider When Investing in IDCW in Mutual Funds

• Dividends’ Origin: When the fund house declares dividends, you should know the origin of the payouts. IDCWs are not always distributed from the profits of your fund. They can also come from other channels, such as interest income. Do not forget to check the past performance of the fund.  
• Payout Distributing Frequency: Choose the frequency of receiving IDCW payments beforehand. Several options are available: monthly, quarterly, and annually. Determine the payout frequency that perfectly aligns with your financial requirements. 
• Tax Applicability: The dividends you earn through IDCW schemes are subject to tax as per your income slab. If you belong to a higher tax bracket, it can impact your wealth creation process. So, calculate the tax implications before deciding whether this strategy is right for you.

IDCW Mutual Funds List

Which One to Choose: IDCW Reinvestment vs Growth?  

Every investor has two options while investing in mutual funds: IDCW and Growth.

When you choose the Growth option, all profits are reinvested, helping you build long-term wealth. 

With the IDCW option, profits are distributed periodically, ensuring regular income. 

Keep in mind that IDCW in mutual funds is not always profit-based. It can be a small part of your invested capital. Choose the option that meets your income needs, future goals and tax implications.

To diversify your investment portfolio, you can consider fixed deposits as well. Booking an FD on Stable Money can help you earn up to a fixed 8.40% annual interest, along with insurance coverage of up to ₹5 lakh by DICGC. Explore the app today!