IDCW Explained: What It Is and How It Works

IDCW stands for Income Distribution cum Capital Withdrawal. It refers to an option where a mutual fund distributes part of its gains to investors at periodic intervals.

Earlier labelled as “dividend”, the term IDCW clarifies that payouts are not guaranteed income. Instead, they represent a distribution from the fund’s accumulated surplus, which may include realised gains.

When an IDCW payout is declared, the amount is credited to the investor’s bank account, and the fund’s Net Asset Value (NAV) reduces by the same amount.

IDCW payouts depend on the fund’s performance and available surplus.

• The fund generates gains through interest, dividends, or capital appreciation

• The fund house may decide to distribute part of this surplus

• The payout amount is announced per unit

• On the payout date, the NAV falls by the declared amount

For example, if a fund has an NAV of ₹50 and declares an IDCW of ₹2 per unit, the NAV adjusts to ₹48 after the payout.

The frequency and amount of IDCW payouts are not fixed. They depend on fund performance and the fund house’s discretion.

Mutual funds typically offer different IDCW frequencies:

• IDCW Payout: The distributed amount is paid out to the investor

• IDCW Reinvestment: The payout amount is reinvested into the same scheme at the adjusted NAV

• IDCW Frequency: Payouts may be monthly, quarterly, or at irregular intervals

Each option serves a different purpose, depending on whether the investor prefers cash flow or continued investment within the same scheme.

Both IDCW and Growth options invest in the same underlying portfolio. The difference lies in how returns are handled.

The choice between the two depends on whether the investor prefers periodic cash flows or uninterrupted growth within the fund.

Compounding works when returns remain invested over time. Since IDCW distributes a portion of gains, the remaining invested amount becomes the base for future growth.

This does not make IDCW unsuitable. It simply means that growth occurs on a reduced capital base after each payout. Investors should view IDCW as a distribution mechanism rather than an indicator of fund performance.

Under current tax rules in India:

• IDCW payouts are added to the investor’s taxable income

• Tax is determined by the fund category and, in some cases, by the investor’s income slab.

• The fund house does not deduct dividend distribution tax

Tax treatment can change over time, so investors should refer to prevailing tax regulations when evaluating options.

IDCW options are often reviewed by investors who:

• Prefer visible periodic cash flows

• Use distributions as supplementary income

• Want flexibility between payout and reinvestment

• Are comfortable with NAV adjustments after payouts

This does not imply suitability for every investor. The relevance depends on individual preferences and financial structure.

• IDCW is not fixed income
Payouts are not assured and depend on fund performance and surplus availability.

• IDCW does not create extra returns
The payout comes from the fund’s own value, which is reflected through NAV adjustment.

• IDCW does not indicate better performance
Funds with IDCW are not outperforming growth options. Both reflect the same portfolio returns in different formats.