"IDCW in Mutual Funds refers to In-Distribution Charge for Withdrawal, a cost that investors might incur when withdrawing funds from a mutual fund before a specified period."
The Securities and Exchange Board of India (SEBI) has made a significant move in the mutual fund industry by renaming Dividend Plans to Income Distribution cum Capital Withdrawal (IDCW) Plans. This change, introduced in April 2021, aims to boost investor awareness and reduce confusion by accurately representing the payout as a combination of income and partial capital return, aligning with SEBI’s push for transparency and standardisation in mutual fund products.
Clarifying the Payout Mechanism
The term IDCW reflects that distributions to investors come not only from income (like dividends or interest) but also from the capital (investment principal) of the scheme, hence clarifying the source and nature of the payouts. This is crucial as mutual funds pay out from both income generated and realized capital gains, something the older term "Dividend Plan" did not explicitly convey.
Greater Transparency and Standardisation
The rename fits into SEBI's broader agenda to categorise mutual fund schemes with standard terms and definitions, aiding comparability and investor understanding. IDCW more precisely describes that investors receive income distributions combined with capital withdrawals, rather than just dividends, which might mislead investors to expect only income-based returns.
The Impact on Investors
Investors should note that returns from IDCW Plans are added to the investor's income and taxed as per their tax slab. Under the 30% tax slab, nearly one-third of the dividend amount is lost due to taxation. However, dividend income up to Rs. 5,000 will not have TDS deduction.
Comparing IDCW and Growth Plans
IDCW Plans do not offer any additional benefits compared to Growth Plans. The key difference lies in the payout mechanism. In IDCW Plans, returns are paid out at regular intervals, while in Growth Plans, returns are reinvested and not paid out, allowing for potential compounding.
It's also important to understand that the misconception that dividends from mutual funds come directly from the stocks in the fund's portfolio is not entirely accurate. Dividends received from mutual funds are not additional income beyond capital gains, as they are paid from the investor's capital when a dividend is declared.
The Value of Investment
Investors should also be aware that the value of their total investment decreases after a dividend payout, even though the investor receives the dividend amount. This is because when a mutual fund declares a dividend, the Net Asset Value (NAV) of the scheme decreases by the amount of the dividend.
In summary, the rename of Dividend Plans to IDCW Plans serves to clarify that dividends from mutual funds are not bonus income but a redistribution of money that was already the investor's. This move is part of SEBI's ongoing efforts to promote transparency and standardisation in the mutual fund industry, ultimately benefiting investors by helping them make more informed decisions.
Investors should be aware that mutual fund payouts from IDCW Plans come from a combination of income generated and realized capital gains, unlike the older term "Dividend Plan" that might have misled them to expect only income-based returns. The new name, IDCW, accurately represents the payout as income distributions combined with capital withdrawals, aligning with SEBI's push for transparency and standardization in mutual fund products, particularly when comparing IDCW Plans to Growth Plans.
