If you’re a mutual fund investor, you might have come across the term “IDCW” while reading through the scheme documents or fact sheets. But what does it actually mean? In this article, we will cover IDCW meaning in mutual fund.
IDCW Meaning in Mutual Fund: Everything to Know
IDCW stands for Income Distribution cum Capital Withdrawal as far as mutual funds are concerned. Having been named as a dividend mutual fund scheme earlier, the term IDCW replaced it on 5th October 2020 and came to use on 1st April 2021. Let us learn more about it.
An IDCW mutual fund is one in which a portion of the investor’s capital can be disbursed and distributed as dividends as opposed to a growth scheme where the surplus funds are used to increase the NAV.
An IDCW holder may get dividends on a daily, weekly, monthly, quarterly, or annual basis. A person who has invested in IDCW has the choice to reinvest the funds or to be paid out.
Any dividend receivable will be sent to your account within 15 days of dividend declaration. Usually, people interested in getting regular income opt to invest in this type of mutual fund scheme.
If you still don’t understand IDCW meaning in mutual fund, then you just need to know that it is a type of mutual fund investment path and that it was earlier named dividend option.
The reason the government made this name change was to make sure the investors didn’t feel any misconception about mutual fund dividends and that this name was more accurate when it came to describing mutual fund dividends.
The three common misconceptions about mutual fund dividends in India are,
- Underlying stocks in the scheme portfolio pay mutual fund dividends.
- Mutual fund dividends are extra income over normal capital appreciation.
- To pay dividends, dividend options of mutual fund schemes book profits regularly.
To solve these misconceptions the name change was initiated and thus IDCW’s name came into existence. So once you understand IDCW meaning you understand the mutual fund dividends system or at least don’t misunderstand it.
Taxation comes down hard on investors. Seeing a chunk of your money taken away from you hurts even if it is negligible, however, some assets are taxed harder than others making them a more stressful investment avenue than others.
This is so the case with IDCW which are subject to higher taxes as compared to say growth mutual funds.
Firstly, IDCW sees the value of its NAV going down as soon as the dividend is paid to the holders. On top of that IDCW taxation depends on your income tax slab.
So, if you belong to the 30% income tax slab category then that is how much you will be paying on IDCW as well since it is treated as an income. On the other hand, income from a growth mutual fund scheme is taxed at 15% or 10% depending on the investment duration.
So that way IDCW meaning in mutual fund should be even clearer as its taxation not only clears the misconception of dividends on mutual funds but also distinguishes between income and returns from mutual funds.
IDCW vs Growth
As mentioned earlier there are various types of mutual fund plans that people can subscribe to of which two are IDCW and growth. We are now about to look at an IDCW vs growth comparison to find out which one of the two is better for people to invest in.
When it comes to profits, IDCW investors are paid dividends whereas growth mutual fund owners’ returns are reinvested in the scheme to increase their unit holding.
Net Asset Value
The NAV of growth mutual fund holders may increase over time as the reinvested profit can help increase its value. Thus, NAV of a growth mutual fund owner is higher compared to IDCW holders whose NAVs are used to pay for dividends causing them to be low and on the decline.
IDCW is treated as an income and so income tax slab rates apply to the return from investment. If you don’t have any other income source, then 10% TDS is charged.
On the other hand, a growth fund scheme investor is charged 15% on returns for short-term gains and 10% for long-term gains.
Since IDCW holders get regular dividends, the returns are low as compared to growth schemes. Growth schemes have long-term wealth creation goals and so they offer higher returns as compared to the IDCW scheme.
An investor who is looking to get quick and regular returns should opt to go for IDCW whereas people interested in long-term wealth creation should opt to go for growth fund schemes.
If it wasn’t obvious when we were looking at IDCW meaning in mutual fund it should now be that growth schemes are better than IDCW when it comes to getting more returns, however, if you are looking for constant returns then the latter might be better for you.
IDCW vs Direct
Direct growth funds have better and lower rates to charge on returns. If you realize the profits within a short period then you pay 15% on short-term gains and if you hold the scheme for a long or the value realized is above 1 lakh rupees then you pay 10% on long-term gains.
Both of these cases are ideal for you if you are a high-income individual as your income won’t impact your investment.
However, if you are holding an IDCW then you need to worry about your income tax slab as it will have a direct impact on the tax you end up paying on your investment.
IDCW returns are counted as income and are thus charged as per the income slab rate. Also, the returns are low compared to direct growth schemes meaning it is a lose-lose situation.
To make matters worse the NAV value of an IDCW goes down with time and up for a growth scheme. This is why the returns improve over the years with the latter.
Also, a direct growth scheme is more useful when you are looking to build wealth and not just looking to get quick returns and so IDCW vs Direct heavily points to the latter being the better choice among the two, however, the choice comes down to each individual.