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If you are a Mutual Fund Investor then at the time you started investing, you might have come through two different plans of mutual fund schemes, Growth Plan and IDCW Plan! Before the year 2021, the IDCW plan in mutual funds was popular as Dividend plans in mutual funds.
The difference between both the plans is, the growth plan of mutual funds does not pay out anything to the investors by the way of regular payouts, and all the profits of the fund generated are reinvested in the fund. Whereas in the IDCW plan, the dividend is paid out of profits earned and income generated, to the investors.
Through this article, we are discussing all IDCW plans in mutual funds that you must know!
What Is IDCW Plan In Mutual Funds?
‘IDCW’ is an abbreviation of ‘Income Distribution cum Capital Withdrawal’. In April 2021, SEBI changed the term “Dividend Option” to “IDCW”. If you had invested in mutual fund Dividend Options, you will now see IDCW next to the mutual fund scheme name in your account statements.
Well, investors must know that only the terminology has been changed while the concept remains the same. Now you might have a query if the concept is the same then why the name changed!
Before we discuss it let us first clearly understand what mutual fund dividends are so that you do not have any misconceptions.
Misconceptions About Mutual Fund Dividends-
Mutual fund dividends are dividends paid by the underlying stocks in the scheme
Reality – Mutual fund dividends may include dividends paid by the underlying stocks. It also includes the profits made by selling stocks in the scheme portfolio.
Mutual fund dividends are extra returns over and above capital appreciation
Reality – Mutual fund dividends are not extra returns over and above capital appreciation. Mutual fund dividends are instead of capital appreciation.
Dividend options of mutual fund schemes book profits regularly
Reality – The underlying portfolio of growth and dividend options of a scheme is the same. Profit booking happens at a scheme level i.e., for both growth and dividend options both. The difference is in how the profits are distributed. In growth option for the profits are re-invested in the scheme. In the dividend option, the profit or a portion of it may be distributed to the investors at the discretion of the AMC.
Why did SEBI change Dividend Plan to IDCW Plan?
Income Distribution cum Capital Withdrawal refers to the distribution of the income of a mutual fund scheme, which may include both dividends paid by stocks and capital gains made by selling underlying stocks of the scheme.
However, SEBI also wanted to emphasize that this income is coming out of your investment value, in other words, it amounts to capital withdrawal. The term IDCW is a more accurate description of mutual fund dividends and provides clarity to investors so that they can make more informed investment decisions.
Should You Invest In Growth Plan Or IDCW Plan?
Well, whether an investor should invest in a growth plan or IDCW plan, must be decided based on what are his investment requirements like whether the investor is directed towards wealth creation or requires regular profits from his investment.
Understand the situation based on the following considerations: -
In the Growth Option, the profits made by the scheme remain invested in the scheme. Over sufficiently long investment tenures, you can earn a profit on profits. This is known as the power of compounding. The power of compounding is a significant factor in wealth creation.
In IDCW, the profits made by the scheme may be distributed to you partially or fully at the discretion of the AMC. You lose the advantage of compounding.
If your investment objective is capital appreciation or wealth creation, you should invest in a growth option.
If you want regular cash-flows from your investments, then you may opt for IDCW. However, you should remember that income distribution is at the discretion of the AMC. There is no guaranteed income in mutual funds.
So, while choosing one option, do reevaluate what do you need from your investment, wealth creation, or regular cash flow!!
Tax Trends For IDCW Plan In Mutual Funds!!
Capital gains upon redemptions in growth options are subject to capital gains tax. Short-term capital gains in equity funds (investment holding period of fewer than 12 months) are taxed at 15% (plus applicable surcharge and cess). Long-term capital gains in equity funds (investment holding more than 12 months) are tax-exempt up to Rs 100,000 and taxed at 10% (plus applicable surcharge and cess) thereafter.
Income (dividends) received in IDCW is added to your gross taxable income and taxed according to your income tax slab rate. From a taxation viewpoint, IDCW is at a significant disadvantage to growth options, for investors in the higher tax brackets.
While you are on the way to choosing between the IDCW plan and growth plan, you should consider your investment needs and tax consequences into consideration and make informed investment decisions; do consult with your financial advisor if required or connect with our executives.
You can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible. Keep reading our article and stay updated with the latest news about Mutual Funds!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).