Concept of IDCW in Mutual Funds !!

Mutual Funds broadly offer investors two options when investing in a scheme viz. Growth option and IDCW option. For novice investors it can be confusing to decide between the two options. In this article, find out what is IDCW in mutual funds and whether it makes sense to opt for it.

- By: Kalpesh Dave, Deputy CEO, Wealth, Bajaj Capital Ltd.

The IDCW option in mutual funds stands for Income Distribution cum Capital Withdrawal. It replaced the term Dividend option that was renamed to IDCW by SEBI in April 2021.

What is IDCW ?

Under the IDCW option, mutual funds distribute profits/income earned under the scheme back to investors as dividends instead of reinvesting them in the scheme. These earnings may arise out of dividends paid by stocks in the underlying portfolio and capital gains made by selling stocks from the portfolio. IDCW payouts are not assured. They depend on mutual fund performance and the AMCs discretion.

Reason behind SEBI change the terminology from Dividend option to IDCW option?

It is a common perception among investors that dividends from mutual funds are extra income over and above the capital appreciation. In reality, dividends declared by mutual funds are a part of the scheme's earnings (such as dividends from stocks, interest from bonds, and capital gains) and the same is paid from investors' capital. In other words, this income comes out of investors' accumulated value. Accordingly, the NAV of the scheme falls to the extent of dividends paid to investors.

So, to avoid misconception in the minds of the investors and to help them take more informed investment decisions, SEBI changed the terminology to IDCW from Dividend. This marks only a change in terminology and has no impact on investors who opted for the IDCW option.

What is the Difference between IDCW and Growth Option?