Posted On Thursday, Aug 29, 2024
The Indian mutual fund industry has grown incredibly fast over the past 10 years. The total assets under management, or AUM as on as on July 31, 2024, stood at ₹64.97 trillion.
What confuses most investors is the right option to choose when investing in mutual funds. There are broadly two options to choose from:
The dividend option to renamed to IDCW in April 2021.
Let us get into the meaning of IDCW in mutual funds in detail!
IDCW full form is Income Distribution cum Capital Withdrawal plan.
What is IDCW? By IDCW - we mean an option where the mutual fund scheme’s returns are distributed to the investors subject to distributable surplus of scheme partially or fully at regular intervals, earlier known as dividends. These intervals may be monthly or based on decided by the Trustee.
Say you purchase 5000 units of a mutual fund scheme. It declared a dividend of ₹1 per unit. Thus, this scheme will pay you ₹5,000 as IDCW.
In IDCW option, part of the scheme’s returns is distributed as payouts, while the growth option reinvest your returns into the scheme to take advantage of compounding benefits.
The distributed income in IDCW option can come from dividends received by the stock held by the fund, interest earned on bonds or gains from selling securities held under the scheme.
Other dividend options were renamed in the following manner:
Option / Plan (existing) | New nomenclature |
Dividend Payout | Payout of income distribution cum capital withdrawal option |
Dividend Reinvestment | Reinvestment of income distribution cum capital withdrawal option |
Dividend Transfer Plan | Transfer of income distribution cum capital withdrawal plan |
To bring more clarity and transparency for the investors, the dividend option rename as IDCW. Many investors would confuse the word “dividend”, perceiving it as an income. A dividend is a distribution of distribution surplus of scheme leading to a decrease in mutual fund NAV or net asset value.
Let us see how IDCW in mutual funds works with an example.
Assume you own 5000 units of a mutual fund scheme. The dividend announced by the mutual fund is ₹1 per unit. That means you will get a dividend of ₹5,000. Dividend payout to the investor will be lower to the extent of Dividend Distribution Tax.
After payment of dividend, the per unit NAV of the Dividend Option of the Scheme will fall to the extent of the payout and applicable statutory levies.
Prior to 2020 - it was mandatory under the law for all companies to pay a dividend distribution tax or DDT equivalent to 15%. From April 2020 onwards, dividends earned through mutual fund schemes are taxable in the hands of investors at applicable income tax slabs.
Therefore, if you fall under the 30% tax bracket, you will have to pay 30% tax on dividends received through IDCW. Moreover, if the dividend amount paid to you in a financial year goes beyond ₹5,000, then a TDS rate of 10% would apply.
Taxation can reduce your investment returns; thus you must be aware of these tax consequences.
Choosing IDCW option is a matter of choice. Some factors to consider include:
For some investors, IDCW plans are a good option, but there is no one-size-fits- all solution. Therefore, it is imperative to thoroughly comprehend your financial objectives and assess your risk tolerance before making any investment decisions.
To make an informed choice, conduct diligent research or consult with a financial advisor.
Remember, it’s never too late to invest. Start your investment journey today!
Disclaimer, Statutory Details & Risk Factors:The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. |
Posted On Thursday, Aug 29, 2024
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