If you have a keen interest in mutual funds and are planning to invest in them, you must know that mutual entails a broader spectrum of terminologies that investors should know well. And one among them is IDCW or Income Distribution cum Capital Withdrawal formally known as a dividend plan.
Each mutual fund scheme comes with two types of plans: growth and dividend (IDCW) for investors to realize their profits.
With a Growth plan, investors can choose to keep their income invested till you cash out of the scheme. Whereas, with the IDCW plan, you can choose to receive payments from your mutual fund investment at regular intervals. The choice of MF plan will depend upon the investor’s financial objectives. If you want to know about what is IDCW in mutual funds, read ahead.
For now, we keep our interest in what is IDCW in mutual funds, what are its features, benefits, and more.
Features of IDCW:
Let’s take a look into some of the salient features and understand what is IDCW in mutual funds.
- The dividend plan (IDCW ) in a mutual fund helps you generate a good steady income. It offers flexibility to investors to choose to reinvest the dividends to buy more units of funds or use the dividend as an income stream.
- Dividend funds aim to minimize the market volatility risk for investors by hedging against market fluctuations. And, when a fund makes a profit or its market value increases, it distributes the profits from the scheme to the investors.
- In dividend payouts, there are two components. One is an income component, and the other is a capital component. Both get distributed to the unitholders. The payment frequency of dividends can be daily, monthly, quarterly or annual. As per the SEBI regulations for mutual funds, the dividend payment must be dispatched to their respective stockholders within 15 days from the record date.
- Dividend plan funds often invest a major chunk of money in dividend-yielding stocks. That is because companies with these stocks have to pay an above-average dividend regularly.
- Dividend mutual funds are known to invest specifically in those companies that distribute a large part of their profits amongst their investors. These companies are usually government and some privately led, which pay back the stakeholders regularly as high dividends to maximize their goals.
- The dividends get paid from the profits from the holdings of that particular mutual fund. Also, dividend payment rates can change with every payout cycle initiated by a fund house.
- IDCW mutual funds are classified into two categories based on asset distribution: dividend-yielding mutual funds (Equity) and dividend-yielding Mutual funds (Debt)
- In a dividend mutual fund (equity), the fund house invests a significant amount in the equity stocks of a company. As per the regulations laid out by the SEBI, an equity mutual fund scheme must invest a minimum of 65% of the MF scheme assets in equities and related instruments. The equity funds help investors realize their capital appreciation for a medium to the long-term investment horizon.
- With dividend mutual funds (debt), a mutual fund house makes investments in specific fixed income instruments like bonds issued by the government and corporate companies, debt securities, money market instruments & more. Debt mutual funds are one of the popular investment options among investors who have a low-risk appetite and want consistent returns. Debt mutual funds are also known as fixed-income securities as the investor is well aware of the returns they will receive from their investment right from the time of the investment. These funds are less risky when compared to equity funds and offer more tax benefits.
- As per the guideline outlined by SEBI, these IDCW schemes must invest a minimum of 65% of their assets in dividend-yielding stocks. Thus, IDCW yielding funds invest 65% of the assets in debt funds and the remaining funds in equity.
- The dividend is taxed according to the income slab rates of the investor. The IDCW of an equity mutual fund is subject to a DDT of 10%. However, the tax gets deducted during the payment process, and hence, once the dividend reaches the investor, it seems tax-free. For non-equity funds like money market, liquid, and debt funds, the dividend distribution tax is 25%.
Benefits of knowing what is IDCW in Mutual funds
IDCW presents investors with a lot of benefits that they can reap through this route.
- Comparatively lower risk zone: Dividend yield mutual funds get less impacted by the market volatility when compared to other mutual fund schemes. It minimizes risk for investors by hedging against market fluctuations. With such a marginal risk level, investors with different time horizons and risk appetites can generate better returns than banks’ fixed deposit schemes.
- Offer better return in the longer term: Dividend mutual funds often target and invest in companies with healthy financial and proven track records. Hence they are capable of generating better returns over time.
- Acts as a regular source of income: Dividend MF can be a great source of consistent income since underlying companies have proven records and declare regular dividends for their stockholders. You are secure in getting steady cash flows.
- Dual investment routes: Investors get the opportunity to invest in mutual funds through a lump sum and Systematic investment plan. In lump sum, investors can pay the whole amount in one go. With a systematic investment plan (SIP), the investors pay the amount of money in intervals like monthly, quarterly, or yearly.
- Tax benefits: Dividends are tax-free. They are tax-free when they reach the hands of the investor, offering a high tax-exemption threshold.
The above information about what is IDCW in mutual funds basically offers you liquidity from your investments, as some of the money you have invested comes back to you regularly. Simply put, the meaning of what is IDCW in mutual funds is for those investors who are seeking regular cash flows from their investments.
If you want to go for a dividend (IDCW) option, make sure you know all about what is IDCW in mutual funds. Also, assess your risk profile, investment duration, and goals before investing in mutual funds.