Do you know that you can earn regular income from your Mutual fund investment? It is possible via the IDCW plan.
In the IDCW plan (formerly known as the dividend option), the dividend income is distributed to investors at periodic intervals rather than being reinvested into the scheme.
In this article, you’ll understand what is IDCW in mutual funds, how it works, and much more.
What is IDCW in Mutual Funds?
IDCW or Income Distribution Cum Capital Withdrawal is a type of plan through which you can earn regular income from your mutual fund investment.
You can get periodic payments even if the fund has earned no profits from the underlying instruments.
This type of payment includes income generated by the scheme and then your invested capital is reduced in the scheme.
You can get these payments every month, quarter, or six months as decided by the mutual fund.
How IDCW Mutual Funds Work?
Let’s understand how payout works on this through an example. Suppose you have invested ₹50,000 in XYZ mutual fund and its NAV (Net Asset Value ) is ₹50. So, you will get 1,000 units.
The XYZ fund has announced a dividend of ₹10 per unit and you will get an IDCW payment of ₹10,000.
The NAV of a fund reduces to ₹40. So, your total investment value will also be reduced to ₹40,000 because you have already received ₹10,000 out of it.
The NAV will change over a period of time and your total investment value also changes, accordingly.
Purpose of IDCW Mutual Funds
In IDCW, your invested capital is paid in the form of a dividend. This plan helps investors who want to earn regular income from their investments such as retirees or people with irregular sources of income.
In IDCW, you can choose from a payout option or a reinvestment option. In the ‘Payout of Income Distribution cum capital withdrawal’ option, you will get regular income.
When you choose the ‘Reinvestment of Income Distribution cum Capital Withdrawal’ option, you reinvest your dividend income and receive more units of the scheme.
Pros & Cons of IDCW Mutual Funds
Here are the pros and cons of investing in IDCW mutual funds.
Pros
- In an IDCW fund, you can get a regular source of income from your mutual fund investment.
- You can combine your investment goals with income goals which means you can invest and earn both at the same time.
Cons
- The regular income you receive from IDCW mutual funds is essentially your invested capital, as the NAV decreases after each payment.
- The amount you receive when selling is lower because the returns aren’t compounded over the investment period.
Taxation of IDCW Mutual Funds
You are taxed on the amount received from the IDCW plan based on your applicable tax slab rate. If your total income from all sources is below the taxable limit, you don’t need to pay any tax.
If your income is more than ₹5,000 in a financial year, the mutual fund house will also deduct TDS at a rate of 10%.
IDCW Vs Growth Mutual Funds
Here are the key differences between the IDCW and growth mutual funds:
| Points of Difference | IDCW | Growth Mutual Funds |
| Profits | Distributed | Reinvested |
| NAV in Profitable Scenario | Profits are distributed and hence NAV gets reduced. | NAV gets increased as profits are reinvested. |
| Returns at the time of Redemption | Lower as profits are already distributed | Higher as profits are reinvested and get compounded over a period of time |
| Compounding Effect | You do not receive compounding returns. | You receive compounding returns. |
| Suitability | Investors looking for regular income | Investors looking for long term wealth accumulation |
Should You Invest in IDCW Funds?
Now you know what is IDCW in mutual funds. Based on that, if you are clear that you want to earn regular income, IDCW funds can be chosen. If your total income is below the taxable rate, choosing an IDCW plan can be tax-effective.
However, if you want to increase your returns over a period of time and want to earn compounded wealth from a mutual fund, IDCW is not suitable for you.
Conclusion
IDCW in mutual funds is a plan in which you can earn periodic income from your investment. Every time you receive the payment, the NAV of the fund reduces leading to a decrease in your investment value.
If you want to invest in IDCW mutual funds, conduct your research and invest as per your suitability.
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