What is IDCW in mutual fund is still a big question among many investors. If you are one of them, then you have landed in the perfect destination. Some may even think of it as a bizarre term. But what remains unchanged is the investment procedure for the stakeholders. Visit this link to know more about what is IDCW in mutual fund:
What Is IDCW In Mutual Fund?
‘Income Distribution cum Capital Withdrawal’ is what is IDCW in mutual fund. After SEBI modified the title “Dividend Option” in equity funds to “IDCW” in April 2021, numerous fund shareholders became aware of this alternative phrase.
If you have participated in a mutual fund program through the dividend Option, the Statement Of Account (SOA) will now show ‘IDCW’ beside the mutual fund plan name. There is no other effect on shareholders because this is hardly a shift in term.
4 Important Aspects About IDCW
Some things about IDCW always go unnoticed or are often misinterpreted. Here are the most important aspects about IDCW that you surely need to know –
IDCW And SWP Are Completely Different
SWPs, or Systematic Withdrawal Plans, enable you to draw predetermined quantities from your mutual fund holdings on a periodic basis, ensuring a steady flow of cash. A mutual fund’s IDCW is not similar to this since, as previously stated, the IDCW is not assured and the magnitude is not consistent.
IDCW Should Not Be Misinterpreted As An Extra Return
One of the most popular fallacies about IDCW, specifically when it’s described as a ‘dividend,’ is that, like yields on shares, it gives a payout to the shareholder in conjunction to the asset’s financial gain. That, however, is not the case. It is the stakeholder’s capital or a portion of the Net Asset Value (NAV) that is given to him in a mutual fund. The NAV is decreased by this sum whenever the fund announces IDCW.
IDCW Has Little To Do With Dividend Yield
Dividend-producing funds are mutual funds that utilize the dividend return of a stock as an evaluation indicator to identify inexpensive equities. A dividend yield fund isn’t one that will offer you consistent dividends. Dividend yield funds provide growth and IDCW alternatives.
IDCW Is Not To Be Considered As Dividend From Stocks The Fund Holds
Another misperception regarding mutual fund dividends is that they are a payout of the fund’s dividends from the equities it owns. This is not the case. A mutual fund’s NAV will rise as a consequence of dividends obtained as a consequence of the equities it owns.
What Should You Consider Before Going For IDCW?
Here are the two points that will help you to understand the importance of choosing IDCW –
This perspective concerns the tax advantages of both strategies. Because the IDCW in a mutual funds scheme is normally paid out periodically, any distribution is counted in the investor’s earnings and taxed appropriately. The rate of taxes is determined by the investor’s tax bracket. The profits made on IDCW will be taxable both as gross income and TDS. This is especially true for traders in higher tax brackets.
If a person wants to build long-term wealth, he or she must participate in mutual fund programs with a growth option. This has the impact of compounding the investment, enabling the buyer to profit over time. If an investor wants monthly cash flow or a short-term investing strategy, the IDCW in mutual funds schemes is a good option.
By now you would’ve understood what is IDCW in mutual fund. The SEBI’s change of conditions for the dividend feature to IDCW has come as a huge comfort to several potential shareholders, since it now properly defines what the choice entails. To summarize, IDCW offers a client the assurance of consistent cash supply without a significant return on their original investment. At a similar moment, the income stream is limited to the fund manager’s absolute judgment.