What is IDCW (Income Distribution Cum Capital Withdrawal) in Mutual Fund

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It's no surprise that mutual funds have become a popular investment option for individuals looking to grow their wealth. With various types of mutual funds available in the market, it can be tricky to understand the different strategies and terminologies associated with them.

One such term that often confuses investors is "IDCW". This feature balances generating income and preserving the invested capital. However, many investors are still unfamiliar with this concept and its implications for their investment portfolio.

What is IDCW in Mutual Funds?

IDCW full form in mutual fund stands for Income Distribution Cum Capital Withdrawal. It refers to a feature offered by mutual funds where investors can receive regular income distributions from the fund and the flexibility to withdraw a portion of their invested capital.

It is an attractive feature for investors seeking a regular income stream and the freedom to access their capital when needed. This feature provides a convenient way for investors to meet their financial goals and manage their cash flow effectively.

By receiving income distributions and the opportunity to withdraw capital, investors can strike a balance between generating income and maintaining liquidity. This flexibility makes IDCW a significant consideration for investors looking for a steady income stream from their mutual fund investments.

How Does Income Distribution cum Capital Withdrawal Work?

Firstly, the mutual fund scheme declares a dividend, which represents the income earned by the fund through its investments. This dividend is then distributed among the investors who are eligible for income distribution. The dividends received by each investor are based on their investment in the scheme.

After the income distribution, investors also have the flexibility to withdraw a portion of their capital if they need it. The withdrawal is subject to certain conditions and may be subject to redemption charges or exit loads, depending on the mutual fund scheme. Investors can withdraw a lump sum or opt for systematic withdrawal plans, which allow them to withdraw regularly at predefined intervals.

The process of income distribution cum capital withdrawal in mutual funds is overseen by the fund house and regulated by the Securities and Exchange Board of India (SEBI). It is essential for investors to carefully evaluate the terms and conditions associated with IDCW and understand the tax implications of the income received and capital withdrawal.

Types of IDCW in Mutual Funds India

Different mutual fund schemes in India offer various types of IDCW options to cater to investors' diverse needs. One common type is the regular IDCW option, where investors receive income distributions at regular intervals, such as monthly, quarterly, or annually. This option suits investors relying on the mutual fund for a steady income stream.

Another type is the growth IDCW option, where the income distributions are reinvested back into the mutual fund scheme, leading to potential capital appreciation over time. This option is ideal for investors prioritising long-term growth and wanting to compound their returns.

There is also the dividend IDCW option, where investors receive income distributions as dividends. This option benefits investors who prefer to receive cash payouts at regular intervals.

What's the New Mandate by SEBI for Dividend Schemes?

In April 2021, SEBI updated the terminology for dividend plans to "Income Distribution cum Capital Withdrawal Plan." This change is retroactive, affecting all past transactions. Under the new guidelines, divide distributing dividends into income distribution and capital withdrawal.

This distinction is clearly outlined in the monthly Consolidated Account Statement (CAS) provided to investors. When the cum dividend Net Asset Value (NAV) exceeds the capital, the surplus is recognized as income. Conversely, if this calculation results in a deficit, the entire amount is categorised as capital withdrawal.

The Reason Behind SEBI's Renaming of Dividend Plans

SEBI's decision to rebrand dividend plans to Income Distribution cum Capital Withdrawal (IDCW) plans in April 2021 was motivated by the need to clear up confusion surrounding dividends in the context of stocks versus mutual funds.

This adjustment in terminology aims to more accurately convey the nature of these plans. Previously, the term "Dividend Plan" led some investors to incorrectly perceive it as a guaranteed bonus, separate from their investment returns, which was misleading.

This new label is applied retrospectively to all transactions. The monthly CAS issued to investors now includes a breakdown of distributions as either income or capital, based on the NAV at the time of dividend versus the underlying capital.

Best IDCW Mutual Funds List

Here is a table showcasing the best IDCW mutual funds:

Scheme Name	AMC Name	Launch Date	Trailing 3 year Annual Dividend Yield	Period Range
DSP Flexi Cap Reg IDCW	DSPMF	29-04-1997	8.68%	14-03-2021 To 14-03-2024
Motilal Oswal Flexi Cap Fund Reg IDCW	MotilalMF	28-04-2014	8.02%	14-03-2021 To 14-03-2024
Axis Flexi Cap Reg IDCW	AxisMF	13-11-2017	7.70%	14-03-2021 To 14-03-2024
HDFC Flexi Cap IDCW	HDFCMF	01-01-1995	7.25%	14-03-2021 To 14-03-2024
ABSL Flexi Cap IDCW Reg	ABSLMF	27-08-1998	5.87%	14-03-2021 To 14-03-2024
PGIM India Flexi Cap Reg IDCW	PGIMIndiaMF	25-02-2015	5.86%	14-03-2021 To 14-03-2024
HSBC Flexi Cap IDCW	HSBCMF	24-02-2004	5.67%	14-03-2021 To 14-03-2024
Franklin India Flexi Cap IDCW	FranklinMF	29-09-1994	5.30%	14-03-2021 To 14-03-2024
Canara Robeco Flexi Cap Reg IDCW	CanaraMF	16-09-2003	4.48%	14-03-2021 To 14-03-2024

Benefits of Income Distribution cum Capital Withdrawal

Investing in IDCW mutual funds can offer several benefits to investors. Firstly, the regular income distributions provided by IDCW options can serve as a stable source of income, making it suitable for retirees or individuals seeking a regular cash flow.

This can help them meet their financial obligations or fulfil their daily expenses. Additionally, IDCW options that reinvest income distributions into the mutual fund can enhance an investor's portfolio through capital appreciation.

Investors may see their investments grow significantly in the long run by allowing the returns to compound over time. Moreover, the dividend IDCW option provides investors with the flexibility to receive cash payouts, allowing them to use the income distributions as they see fit.

is the Difference Between Dividend Declared by Companies and IDCW from Mutual Funds?

Dividends declared by companies and IDCW from mutual funds may both appear similar in terms of providing income to investors. However, there are significant differences between the two.

When a company declares a dividend, a portion of its profits is usually distributed to its shareholders. The dividend amount is determined by the company's board of directors and paid out to shareholders in cash or additional shares. This dividend depends on the company's financial performance and is not guaranteed.

On the other hand, IDCW in mutual funds refers to the distribution of income and capital gains generated by the mutual fund's investments. Unlike company dividends, IDCW is not directly linked to the performance of a single company. Instead, it is based on the overall performance of the mutual fund's portfolio.

Frequently Asked Questions

Q: What does mutual funds IDCW mean?

A: Income Distribution cum Capital Withdrawal (IDCW) in mutual funds refers to the distribution of income in a mutual fund scheme.

Q: What is better growth or IDCW?

A: The choice between growth and IDCW depends on the investor's financial needs and goals. If the investor requires regular income, IDCW could be a better option. However, the growth option could be more suitable for long-term wealth creation as it allows the profits to be reinvested and compounded over time.

Q: What is IDCW reinvestment?

A: IDCW reinvestment is an option in which the income distributed by the mutual fund is not paid out to the investor but reinvested back into the scheme.

Q: What is IDCW interim?

A: IDCW interim refers to the income distribution made by a mutual fund scheme during a specific period within the financial year before the final distribution. It's part of the total income to be distributed for that year.