IDCW in Mutual Funds: Meaning, Benefits & Payout Options
16 June, 2025
Synopsis
IDCW in mutual funds provides regular payouts from fund earnings, offering periodic income without needing to redeem your full investment.
These payouts reduce the NAV as they are a partial return of profits and capital, unlike stock dividends, which are purely profit-sharing.
While IDCW suits those seeking regular income, it limits compounding and may be less tax-efficient.
Think of mutual fund investment like owning a fruit-bearing tree in your backyard. Now, suppose you decide to regularly pluck the ripe fruits and trim a few branches each time for firewood. You get the benefit of fruits and wood in hand, but the branches on your tree decrease over time.
This is how IDCW works: what you receive as income is a mix of the returns (fruits) and a part of your invested capital (branches). The total value of your investment reduces accordingly. It’s not an extra reward or a bonus; it is a portion of what already belongs to you, given out in parts.
In mutual funds, IDCW offers periodic income to investors without needing to redeem their full investment. It's a cash flow benefit from your existing mutual fund holdings.
What is IDCW in Mutual Funds?
IDCW stands for Income Distribution cum Capital Withdrawal. Previously referred to as ‘dividend option,' the name was changed by SEBI in 2021 to reflect the actual nature of payouts. Unlike stock dividends, which are purely a share of profits, IDCW payments in mutual funds are partly from the fund’s returns and partly from your own invested capital.
This means that when a mutual fund declares an IDCW, the payout is transferred to your bank account, and the Net Asset Value (NAV) of the fund reduces by an equivalent amount. Unlike growth funds, where returns are reinvested automatically, there is no automatic reinvestment of income generated in IDCW plans.
How Does IDCW Work?
When you choose the IDCW mutual fund scheme, you get payouts whenever the fund declares them. These payouts are given regardless of the market situation. However, after the payout, the NAV, i.e., the value of each unit of the share, decreases because the money is withdrawn from the fund’s total value.
In simple terms:
The earnings from mutual funds lead to IDCW investors receiving their share of the distributions.
As a result, the NAV adjusts downward post-distribution.
Taxation of IDCW
Since April 1, 2020, IDCW payouts are taxed as per the investor’s individual income tax slab, unlike the earlier system where dividends were taxed at the fund house level through Dividend Distribution Tax (DDT). This shift can significantly affect your net returns, especially if you're in a higher tax bracket.
Let’s understand with a simple example:
Suppose you receive an IDCW payout of ₹10,000 in a financial year.
If you fall in the 30% income tax slab, your tax liability on this amount would be ₹3,000.
This means the actual benefit you receive post-tax is only ₹7,000.
Benefits of IDCW in Mutual Funds:
1. Balanced Income
IDCW strikes a balance between generating income and potentially increasing investment value. Investors can enjoy periodic income while retaining the potential for the investment to appreciate over time.
2. Risk Management
Investors choose IDCW mutual fund schemes to not only generate a regular income but also invest in these funds to minimise their risk by diversifying their fund portfolios.
Regular Income
IDCW offers a regular payout flow to investors and a less risky investment option.
3. Cash Flow Management
Investors get regular payouts from the IDCW mutual fund scheme that they can use to pay EMIs, expenses, or retirement planning.
IDCW is not an added profit but a payout from your investment itself. It offers flexibility and regular income but may not always be suitable for long-term financial objectives due to tax and compounding limitations. Investors must understand how IDCW affects NAV, taxation, and overall returns before opting for it in any mutual fund scheme.
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