What is IDCW (Income Distribution cum Capital Withdrawal)

Seasoned mutual fund investors might be familiar with the ‘Dividend Option’ that mutual fund companies offer, wherein the dividends aren’t reinvested but rather distributed among unitholders. As of 2021, this option has been renamed to ‘Income Distribution cum Capital Withdrawal Plan’ or the IDCW Plan.  

This change in nomenclature has naturally caused some confusion among investors. If you’re wondering what is meant by IDCW in mutual funds, or what is an IDCW plan, you’re in the right place.

Here we discuss everything you need to know to clear the fog, from IDCW’s meaning and why SEBI changed the name of Dividend Option to how they work.

What is IDCW in Mutual Funds?

If you’re wondering exactly what is IDCW in MF, it is simply what ‘Dividend Option’ was previously. With mutual fund investment, you can choose how you want to receive your earnings. IDCW offers two options in this regard:

• Regular IDCW: This entails you receiving a portion of your earnings, including your interest and the stock dividends periodically. This is ideal for those wanting a steady source of income, such as retirees.
• Growth IDCW: This option reinvests your IDCW amount automatically into the fund and allows your earnings to compound over time. This is ideal for those who are looking for long-term capital appreciation.

Why Did SEBI Change the Name of Dividends to IDCW?

SEBI notified investors of this change via a circular in April'21, with the aim of giving more clarity to investors. You see, a novice investor might understand that ‘Dividend Option’ means that the mutual fund will pay dividends like stocks do. This is incorrect.

The new name- IDCW, highlights that the income distributed to investors is not dividends but their own money which includes the investment returns as well as dividends paid by companies.

How Does IDCW work?

Now that you know what is IDCW and IDCW meaning in mutual fund, here are some points to keep in mind:

• IDCW includes interest earned by the fund and stock dividends, making them different from regular payouts from the mutual fund.
• IDCW can include your initial investment amount or principal invested in the mutual fund.
• IDCW can reduce the total invested amount, unlike the growth option wherein payouts are reinvested.
• IDCW suits those wanting a regular income stream as it offers limited capital access, which is still being invested.

To Sum Up

While IDCW plans (formerly known as Dividend Option) don’t offer any additional benefit, after discussing IDCW’s meaning in mutual funds and how it works, it is clear that IDCW mutual fund schemes are a profitable alternative to regular investments such as sovereign savings schemes and fixed deposits.