Why Does a Mutual Fund's NAV Falls After an IDCW Payout?

A mutual fund’s NAV may fall after an IDCW payout because the fund is not “giving investors any additional/extra income”. It is only transferring a part of the scheme’s existing assets from the fund to unitholders. 

Post-payout, since fewer assets remain in the scheme but the number of units remains unchanged, the NAV (representing the “value per unit”) falls. 

When investing in a mutual fund, investors generally choose between two plans: Growth and IDCW (Income Distribution cum Capital Withdrawal). 

Under the Growth plan, returns remain invested in the scheme. Whereas, under IDCW, the scheme may distribute a portion of its “distributable surplus” to investors, either as a payout or through reinvestment in additional units. 

However, following an IDCW distribution, the scheme's NAV may fall. But what causes this reduction, and how does it influence your investment value? Let's understand in this article.

IDCW full form is Income Distribution cum Capital Withdrawal. SEBI renamed the old “dividend option” to IDCW with effect from April 1, 2021. The renaming was primarily done to make clear that an IDCW payout may include not only income/gains but also a return of the investor’s own capital. (Source: SEBI Circular - Review of Dividend Option)

In an IDCW option, the amount distributed to investors may come from three different components:

1. Income Earned By The Scheme: This includes income generated from interest on bonds, dividends received from stocks, and other income earned by the mutual fund's investments.
2. Realised Capital Gains: When the scheme sells its investments at a profit, the gains realised may contribute to the amount available for distribution.
3. Investor's Capital: An IDCW payout may also involve a withdrawal from the scheme's capital. Consequently, a portion of the amount distributed may come from the investor's own invested capital.

A mutual fund's Net Asset Value (NAV) represents the value of its “net assets” per unit. It is calculated using the following formula:

*Net assets refer to the scheme's total assets minus its total liabilities.

When a mutual fund declares an IDCW payout, it distributes a portion of the scheme's assets to eligible investors. Consequently, the amount paid out reduces its net assets. 

However, the number of units held by investors remains unchanged. As a result, the NAV per unit falls after the payout. For more clarity, let’s study an example.

Example: How an IDCW Payout Influences Your Investment

Suppose a mutual fund scheme has total net assets of ₹10 lakh and its 50,000 units are outstanding. Thus, the current NAV is ₹20 per unit. Now, you invest ₹20,000 in the scheme and receive 1,000 units.

The fund subsequently declares an IDCW of ₹2 per unit. Assume the payout is made to all 50,000 units and there are no other changes in the scheme's assets or liabilities. Let’s see how such a payout may impact the fund’s NAV:

A) The Scheme's Net Assets Decrease

The fund pays ₹2 per unit across 50,000 units. It distributes a total of ₹1 lakh to investors. 

B) The NAV Falls After the Payout

The number of outstanding units remains 50,000, but the scheme's net assets fall to ₹9 lakh.

Observe that the NAV decreases from ₹20 to ₹18 because the scheme's net assets have reduced while the number of outstanding units remains unchanged.

C) The Value of Your Investment Decreases

Since you hold 1,000 units, the value of your mutual fund investment also falls after the payout.

Therefore, an IDCW payout does not create any additional return or wealth. It only transfers a portion of the value held in your mutual fund investment to you as cash.

Note: The NAV reduction may be greater than the IDCW amount if the scheme bears any applicable tax or statutory levies. Also, market movements and other changes in the scheme's assets or liabilities can influence the actual NAV after the payout.

So, now you know what an IDCW payout option is and how it reduces the NAV of a mutual fund scheme. To revise, IDCW is one of the two options available to mutual fund investors, the other being the “Growth” option. 

Under IDCW, the scheme's distributable surplus is paid out to unitholders in proportion to their holdings. This distributable surplus may come from three components:

1. Income Earned: Interest from bonds, dividends from stocks, and other income generated by the scheme.
2. Realised Capital Gains: Profits earned when the scheme sells its investments.
3. Return of Capital: A portion of the investor's own invested capital.

Realise that an IDCW payout involves distributing a part of the scheme's assets. Thus, after the payout, “net assets” decrease while the number of outstanding units remains unchanged. Consequently, the NAV per unit falls by the amount distributed per unit, subject to applicable taxes, levies, and other changes in the scheme's value.

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. Does NAV drop by the exact amount of the dividend distributed?

No, the actual reduction may vary due to factors such as:

• Changes in the market value of the scheme's investments
• Changes in its liabilities, and 
• Any applicable taxes or statutory levies borne by the scheme.

Thus, the actual NAV reduction depends on the distribution and any other changes influencing the scheme's net assets.

2. Does a fall in NAV after an IDCW payout mean I lost money?

The fall in NAV only reflects the distribution of a portion of the scheme's assets to investors. For example, 

• Suppose your investment is worth ₹20,000 before a payout.
• You received ₹2,000 as IDCW.
• Now, the NAV reduction may bring its value to ₹18,000.

However, your combined value still remains ₹20,000 (Investment + IDCW), assuming no other changes in the scheme's value and excluding applicable taxes.

3. How is the IDCW amount decided by a mutual fund?

Generally, the AMC decides whether to declare an IDCW and the amount, subject to the scheme's provisions and applicable SEBI regulations. Usually, the decision depends on factors such as:

• The distributable surplus available
• Income earned
• Realised gains, and 
• The scheme's distribution policy

Note: The IDCW payouts are not guaranteed, and a scheme may also choose not to declare an IDCW.

4. What is the difference between IDCW payout and IDCW reinvestment in mutual funds?

The difference lies in how the IDCW amount is used. 

• Under the IDCW payout option, the mutual fund distributes the declared amount to your registered bank account. 
• Whereas, under the IDCW reinvestment option, the declared amount is used to purchase additional units of the same mutual fund scheme at the prevailing NAV. 

As a result, your unit holdings increase in IDCW Reinvestment, but you do not receive the amount as cash in your bank account. In both cases, the NAV reduces to reflect the distribution.

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