What is IDCW in Mutual Fund?

IDCW full form is Income Distribution Cum Capital Withdrawal. It is the current regulatory name for what was earlier called the “dividend” option in mutual funds. In this option, a scheme periodically pays out a portion of its surplus or capital to investors (in proportion to the unit holding). 

In India, when investing in a mutual fund, most schemes offer two options: Growth and IDCW. Although both invest in the same portfolio, they differ in the way returns are handled. 

Under the Growth option, any gains earned by the scheme remain invested, and investors do not receive periodic payouts. Potentially, this allows the fund's Net Asset Value (NAV) to grow over time. This option is generally chosen by investors with a long-term wealth creation objective. 

On the other hand, some investors may prefer regular cash receipts instead of allowing all gains to remain invested. For such cases, mutual funds offer the IDCW option, under which the scheme may distribute money to investors whenever it has a distributable surplus. 

Need more clarity? Read this article till the end to understand what IDCW is in a mutual fund​​, how it works, and its different types.

IDCW full form in mutual fund​ is Income Distribution Cum Capital Withdrawal. It is an option under which the fund may distribute money to investors whenever it has a distributable surplus. The word “cum” is highly important for investors. It divides an IDCW distribution into two broad components:

The payment is made only if the fund decides to declare an IDCW. It is not guaranteed and does not follow a fixed schedule. Since this payment includes both these components, it is called Income Distribution cum Capital Withdrawal (IDCW). 

How Does IDCW Work?

When a mutual fund declares an IDCW, the fund distributes an amount to eligible investors based on the number of units they hold. After the distribution, the fund's Net Asset Value (NAV) may fall by approximately the amount distributed per unit because that value has been paid out of the scheme. 

Consequently, the total value of the investor's investment changes accordingly.

As per general market understanding, mutual fund schemes offer two IDCW options:

• IDCW Payout

and

• IDCW Reinvestment

In both options, the fund may declare an IDCW only when it has a distributable surplus. The difference lies in how the distributed amount is used. Let’s understand in detail:

Note: Neither of the IDCW types creates any additional wealth. They only change how the value of the investment is distributed, either as a cash payment or as additional units through reinvestment. The payment may include both the scheme's income and a part of the investor's capital.

Let’s study two different examples to better understand “what is IDCW in a mutual fund​”:​

Example 1: IDCW Payout Option

Suppose an investor owns 1,000 units of a mutual fund with an NAV of ₹20 per unit. The fund declares an IDCW of ₹1 per unit.

• Now, the investor receives ₹1,000 (1,000 units × ₹1 pr unit) in the bank account.
• After the payout, the fund's NAV falls from ₹20 to about ₹19 per unit (assumed).
• The number of units remains 1,000.

The investor receives cash, while the value of each unit potentially reduces by the amount distributed.

Example 2: IDCW Reinvestment Option

Suppose an investor owns 1,000 units of the same fund with an NAV of ₹20 per unit. The fund declares an IDCW of ₹1 per unit, but the investor has selected the IDCW Reinvestment Option.

• Instead of receiving ₹1,000 in cash, the amount is used to buy additional units of the same fund.
• After the IDCW declaration, the NAV falls to about ₹19 per unit.
• The ₹1,000 distribution buys approximately 52 additional units .
• The investor now holds 1,052 units instead of 1,000 units.

The investor does not receive cash. The distributed amount remains invested in the mutual fund through additional units. 

So, now you know what IDCW full form in mutual fund​ is, how it works, and the different options available under it. If we were to revise, Income Distribution cum Capital Withdrawal (IDCW) is a mutual fund option under which the scheme may distribute money to investors at its discretion (usually happens whenever the scheme has a distributable surplus). 

These distributions can include both the income earned by the scheme and a part of the investor's capital. In this option, investors may:

• Receive periodic cash payouts (through the IDCW - Payout variant) 

or

• Choose to have the distributed amount reinvested into the same scheme (through the IDCW - Reinvestment variant)

An IDCW is different from the Growth option, where no distributions are made, and all gains remain invested in the fund. The potentially “right” choice between Growth and IDCW? It depends on an investor's financial goals, cash flow requirements, investment horizon, and tax considerations.

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. Why did SEBI replace “Dividend” with a new terminology of IDCW?

Many investors assume that every payment received from a mutual fund is a return generated by the fund. But that is not always the case. SEBI introduced the terminology “Income Distribution cum Capital Withdrawal (IDCW)” to let investors understand that the amount paid to investors may include both:

• The income earned by the scheme

and 

• A part of the investor's own capital

This is why the term replaced the earlier term "Dividend" for a mutual fund. This change applied to distributions with record dates on or after April 1, 2021. 

2. Is the “IDCW Reinvestment” option the same as the “Growth” option?

No, in the IDCW Reinvestment option, the mutual fund first declares an IDCW and then uses the distributed amount to purchase additional units. As a result, the fund's NAV falls by the amount distributed. 

Whereas, in the Growth option, no IDCW or dividend is declared. Any gains remain invested within the scheme, allowing the NAV to potentially grow over time without any periodic distribution.

3. How are IDCWs in mutual funds taxed?

Since the abolition of the Dividend Distribution Tax (DDT) in 2020, IDCW received from mutual funds is taxable in the hands of investors according to their applicable income tax slab. 

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