IDCW vs SWP: What’s the Difference and Which Withdrawal Option Should You Choose?

In the Income Distribution cum Capital Withdrawal (IDCW) option, the scheme may declare and distribute an amount to the unitholders. The investor can either receive the amount in cash under “IDCW Payout” or use it to purchase additional units under “IDCW Reinvestment”.

Whereas in an Systematic Withdrawal Plan (SWP), the investor instructs the mutual fund to redeem a specified amount of units at regular intervals.

To receive cash inflows from mutual funds, investors have several options, with the primary ones being IDCW (Payout and Reinvestment) and SWP. Both options differ in:

• How the money is distributed
• Who decides the withdrawal, and 
• How the investor's units and NAV are affected.

Want to learn about both the withdrawal options? Read this article to first learn the SWP and IDCW meaning, their types, and working. Next, check out a detailed comparison between IDCW vs SWP​, and lastly, understand which option may potentially suit you.

SEBI introduced IDCW in April 2021, replacing the earlier term “Dividend Plan.” The IDCW full form is Income Distribution cum Capital Withdrawal. It is an option in a mutual fund scheme under which the fund may periodically distribute returns to investors. 

The amount paid as IDCW can come from the following two components:

Note: IDCW is a distribution from the mutual fund. It should not automatically be viewed as profit or additional return on the investment.

There are two ways an investor can receive the amount declared under an IDCW option:

1. IDCW Payout

Under the IDCW Payout option, the declared IDCW is paid directly to the investor's registered bank account. The investor does not receive additional mutual fund units from the distribution. For example:

• Suppose an investor holds 2,000 units of a mutual fund and the fund declares an IDCW of ₹5 per unit. 
• The IDCW received would be ₹10,000 (2,000 units × ₹5 per unit).
• The investor receives ₹10,000 in the registered bank account. 
• The number of units remains 2,000.

2. IDCW Reinvestment

Under the IDCW Reinvestment option, the declared IDCW is not paid to the investor as cash. Instead, the amount is used to purchase additional units of the same mutual fund scheme at the applicable NAV. 

Continuing with the above example:

• Suppose the applicable NAV for reinvestment is ₹50.
• The declared IDCW amount of ₹10,000 would purchase 200 additional units 

• The investor would then hold 2,200 units.

SWP full form is Systematic Withdrawal Plan. It is a facility offered by mutual fund schemes that allows an investor to withdraw a “predetermined amount” from an existing mutual fund investment at regular intervals. 

The withdrawal can be scheduled monthly, quarterly, or annually, depending on the investor's requirement and the available options under the scheme.

Under an SWP, units equivalent to the requested withdrawal amount are redeemed at the applicable NAV on each withdrawal date. The remaining units continue to stay invested in the mutual fund. For a better understanding, let’s see how SWP works.

The working of an SWP in a mutual fund can be understood through these three steps:

1. Start With an Existing Investment

The investor first invests a lump sum in a mutual fund scheme. An SWP can then be set up against the units held in that investment. 

• For example, an investor has ₹10 lakh invested in a mutual fund.

2. Choose the Withdrawal Amount and Frequency

The investor decides how much money should be withdrawn at each interval and how often.

• For example, suppose the investor chooses to withdraw ₹30,000 per month through an SWP.

3. Units Are Redeemed, and the Remaining Amount Stays Invested

At each withdrawal date, the mutual fund redeems the number of units required to provide the selected withdrawal amount at the applicable NAV. The remaining units stay invested in the scheme.

• For example, 
  • Suppose the applicable NAV is ₹50.
  • Now, a ₹30,000 withdrawal would require 600 units (₹30,000₹50).
  • So, 600 units would be redeemed, and the remaining units would continue to be invested.

Additionally, the value of the remaining investment can fluctuate based on the future NAV of the scheme. 

Both IDCW and SWP can provide cash flows from a mutual fund investment, but they work differently. As per general market understanding, IDCW is a “scheme distribution”, whereas SWP is a “systematic withdrawal facility” initiated by the investor.

To gain more clarity, let’s understand the difference between IDCW vs SWP in detail:

The choice between IDCW and SWP depends on how the investor wants to receive money from a mutual fund investment. 

Note that the amount and timing of the declared IDCW cannot be predetermined or guaranteed. In contrast, under SWP, the investor can set a specific withdrawal amount and frequency, subject to the available units and scheme provisions. 

Therefore, an investor looking for a planned and predetermined cash flow may potentially consider an SWP, as the withdrawal amount and frequency can be selected in advance. 

In comparison, an IDCW may be relevant for investors who are flexible with the distribution amount and timing not being predetermined and varying based on the scheme's provisions and available distributable surplus.

So now you know about both SWP and IDCW meaning, their working, and differences. If we were to revise, IDCW and SWP are two options available through mutual fund schemes to receive cash flows amongst others. 

Under IDCW, the mutual fund scheme declares an IDCW as per its provisions and available distributable surplus, whereas under an SWP, the investor instructs the mutual fund scheme to redeem a predetermined amount of units at regular intervals.

The choice between IDCW and SWP potentially depends on the investor's cash flow requirements, investment objectives, and preference for “control over withdrawals”.

For more information, you can visit www.tatamutualfund.com/deshkarenivesh. The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com

1. What is IDCW in mutual fund, and how does it work?

Under the IDCW option, a mutual fund scheme may distribute an amount to investors from its “distributable surplus”, which can include income, gains, or a portion of capital. 

The investor can receive the amount under IDCW Payout or use it to purchase additional units under IDCW Reinvestment. 

2. What is IDCW full form, and how is it different from the growth option?

The IDCW full form is Income Distribution cum Capital Withdrawal. Besides, IDCW, mutual fund schemes also offer a “Growth” option to the investors. In this variant, the declared gains remain invested in the scheme, and no IDCW is distributed to the investor.

If we compare the Growth Option with “IDCW Reinvestment”, in the latter option, new or additional units can be created, and an investor’s unit holdings may increase however, NAV may fall to the extent of IDCW paid.

Whereas in the Growth Option, the potential gains remain within the scheme, and the NAV may potentially rise accordingly.

It must be noted that the value of portfolio under both the options ‘Growth Option with IDCW Reinvestment’ may remain the same.

3. What is the SWP full form, and how does it differ from the IDCW payout option?

The SWP full form is Systematic Withdrawal Plan. Under SWP, the investor decides the withdrawal amount + frequency, and units are redeemed to provide the scheduled payment, subject to sufficient units being available. 

Under IDCW Payout, the mutual fund scheme declares an IDCW based on its provisions and available distributable surplus. The declared amount is neither fixed nor predetermined.

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