To trade effectively, a stock or mutual fund investor must be familiar with a wide range of strategies and terms. Understanding the terminology is essential since mutual funds and stocks are very different.
To invest effectively in mutual funds in India, you must understand words like growth, dividend, regular, and direct. Growth and dividends are the methods of distributing profits, whereas regular and direct are the forms of investing.
Since a mutual fund scheme’s growth and dividend plans invest in the same financial securities, they are essentially two sides of the same coin. However, dividend schemes distribute the gains to investors, whereas growth plans reinvest all scheme profits.
Returns under a dividend plan are calculated by the number of units you own. For instance, you will receive INR 10,000 as a dividend if a plan announces a payout of INR 10 and you own 1,000 units.
But as of April 2021, the Securities and Exchange Board of India, or SEBI, has renamed the word “Dividend” as “IDCW,” making the term “Dividend” obsolete. The definition of IDCW in mutual funds is covered in full in this article.
What is IDCW in Mutual Funds?
The acronym for “Income Distribution cum Capital Withdrawal” is “IDCW.” Investors in mutual funds have been exposed to IDCW since April 2021, when SEBI replaced the term “Dividend Option” in mutual funds with “IDCW.”
Your statement of account (SOA), which was given to you by the AMC, would now have IDCW next to the name of any mutual fund scheme in which you had invested under the dividend option. There is no effect on investors because this is only a change in wording.
What is SEBI’s New Rule on Dividend Plans?
In accordance with the regulations set forth by the Securities and Exchange Board of India (SEBI), the terminology ‘Dividend’ changed as of April 1, 2021. Mutual Funds no longer use the term ‘Dividend’; instead, it has been replaced with ‘distribution.’ Furthermore, the previously designated ‘Dividend Plan’ of a Mutual Fund scheme is now referred to as the ‘Income Distribution cum Capital Withdrawal Plan’ or IDCW Plan.
Should You Invest in the IDCW Option?
The appropriate choice depends on your specific requirements. For instance, if you are a salaried individual with no need for additional income on a monthly or periodic basis, opting for the Income Distribution cum Capital Withdrawal (IDCW) option may not be practical. Choosing growth options that capitalise on compounding over time would be suitable.
However, there are situations where the IDCW option can be advantageous. For instance, if you have invested in a mutual fund with a specific goal, such as covering tuition fees for your child, then opting for IDCW is a reasonable decision.
For retirees seeking regular income to meet expenses, investing in the IDCW option makes sense. This option has the potential to generate consistent income while also offering capital appreciation. It’s essential to note that equity IDCW options come with inherent risks, and returns or dividend payouts are contingent on market conditions. Consulting a financial advisor is advisable if you’re uncertain whether the IDCW option aligns with your needs.
Bottom Line
Choosing Income Distribution cum Capital Withdrawal (IDCW) Plans, formerly known as Dividend Plans, does not provide any extra advantages. As the revised name accurately indicates, IDCW plans essentially involve redistributing a portion of your existing capital back to you.
Even if your goal is to secure regular income from Mutual Funds, investing in the Growth Option and withdrawing funds according to your requirements is more advisable. This approach ensures that you retain control over when to access your funds rather than relying on the Mutual Fund to dictate the timing of your withdrawals.