What is IDCW in Mutual Fund – Meaning & How It Works

When you start investing in mutual funds, you’ll come across several terms that can sound confusing at first. One such term is IDCW. If you’ve ever wondered, “What is IDCW in mutual funds?”, “Is it better than the growth option?”, or “Should I choose IDCW or SWP?” You’re in the right place.

In this guide, we’ll explain IDCW in simple words, cover how it works, its pros and cons, answer common investor questions, and help you decide if it’s right for you.

What is IDCW in Mutual Funds?

IDCW stands for Income Distribution cum Capital Withdrawal. This is a mutual fund payout option where the fund house (AMC) distributes part of the income or capital gains from the fund’s investments to investors.

Until 2021, this was called the dividend option. SEBI renamed it to IDCW to make it clear that the money you receive could come from both income (like dividends, interest, rent) and your invested capital, not just profits.

Why Was It Renamed from Dividend to IDCW?

Earlier, the word dividend made many investors believe payouts were only from profits. But sometimes, to maintain regular payouts, the AMC would dip into the invested capital.

To avoid this misunderstanding, SEBI changed the term to Income Distribution cum Capital Withdrawal, making it clear that distributions may be part income and part capital.

How Does IDCW Work?

Here’s a simple breakdown:

1. You invest in a mutual fund with the IDCW option.
2. The AMC invests your money in assets like stocks, bonds, or government securities.
3. These investments generate returns through income (interest, dividends) and capital appreciation.
4. If the AMC has surplus income or gains, it may declare an IDCW payout.
5. The payout amount is credited to your bank account, and your fund’s NAV reduces accordingly.

Types of IDCW Options

Mutual funds may offer IDCW in different frequencies:

• IDCW – Regular Payout: Distributions happen at regular intervals, such as monthly, quarterly, or half-yearly.
• IDCW – Periodic: Payouts are made irregularly and depend on the availability of a distributable surplus.
• IDCW – Reinvestment: Instead of a cash payout, the amount is reinvested to purchase more units of the mutual fund.

When investing in mutual funds, select the IDCW option for regular income. If you don’t need regular cash flow, the Growth option may be better, as it reinvests earnings to help your investment grow through compounding.

IDCW vs. Growth Option: What’s the Difference?

Understanding the difference between IDCW and Growth options is important for smart investing:

Feature	IDCW Option	Growth Option
Payout	Periodic income distribution (not guaranteed)	No payout – returns are reinvested
NAV Behavior	Falls after payout	Grows over time with compounding
Tax Treatment	Taxed as per income slab	Capital gains tax on redemption only
Suitability	Investors seeking regular cash flow	Long-term wealth accumulation

Example:

Assume you invest ₹10 lakh in a mutual fund. If the fund declares an IDCW of ₹5,000, you will receive ₹5,000 in your bank account, but your NAV will adjust downward. With the Growth option, that ₹5,000 remains in the fund, contributing to the overall growth of your investment.

What is the Benefit of IDCW in Mutual Funds?

The main benefit is regular cash flow without selling your mutual fund units. This is useful if you need periodic income for expenses like household costs, EMIs, or lifestyle needs.

What Are the Disadvantages of IDCW?

• No Guarantee: Payouts depend on fund performance; there’s no fixed amount.
• Tax Inefficiency: Taxed at your income slab, which may be high for top earners.
• Lower NAV: Every payout reduces your NAV and potential future returns.
• Part Capital Return: Sometimes, payouts are from your own invested money.

How to Claim IDCW in a Mutual Fund?

You don’t need to “claim” it separately. If you select the IDCW option during investment:

• The AMC credits payouts directly to your registered bank account on the declared date.
• Make sure your bank details in the folio are correct to avoid missed credits.

Which is Better – SWP or IDCW?

• SWP (Systematic Withdrawal Plan): You decide the withdrawal amount and frequency. Money comes from redeeming your units, giving you more control.
• IDCW: The AMC decides payout timing and amount.

If you want predictable income, SWP is better because you control the flow. IDCW works for those comfortable with variable payouts decided by the fund house.

Taxation of IDCW

• Taxed as regular income as per your slab rate.
• If your total IDCW exceeds ₹5,000 in a financial year, 10% TDS is deducted (20% + surcharge/cess for NRIs).
• IDCW does not get capital gains tax benefits or indexation.

IDCW in Debt Funds vs Equity Funds

• Debt Funds: Payouts are usually more regular because debt instruments earn predictable interest.
• Equity Funds: Payouts are less predictable because returns depend on stock market performance.

Who Should Choose IDCW?

• Retirees who need a steady income.
• Investors who want periodic payouts without redeeming units.
• Conservative investors are comfortable with moderate returns.

If you’re young and want to grow wealth, Growth is usually better because of compounding.

Conclusion

Your financial goals should show whether you choose the IDCW or Growth option. If you need regular income to support your lifestyle or meet expenses, IDCW could be a good option. But remember the taxation impact and the risk of irregular payouts.

If your goal is long-term wealth creation, and you don’t need regular cash flow, the Growth option is usually better. It allows your investment to compound over time without frequent withdrawals.