The Securities and Exchange Board of India (SEBI) has renamed mutual fund dividend programmes as Income Distribution Cum Capital Withdrawal (IDCW) schemes, beginning April 1, 2021. SEBI did this to clear any misconception between income and capital in the minds of investors.
What is SEBI’s IDCW?
A dividend plan is a mutual fund plan that offers regular payouts to investors in the form of dividends. The payout amount is dependent on the NAV (Net Asset Value) of the mutual fund scheme. The frequency of payouts can be monthly, quarterly or annually. The dividend payout reduces the NAV of the mutual fund scheme as the value of the assets is decreased by the amount of the dividend payout.
The new IDCW plan will function in the same manner as the earlier dividend plan. The main difference is that both income and capital withdrawal will categorize the payout to investors. The dividend payout portion will be treated as income, while the reduction in net asset value (NAV) due to the payout will be treated as capital withdrawal.
For example, suppose an investor has invested in a mutual fund scheme with an NAV of Rs. 100 and the mutual fund scheme declares a dividend of Rs. 2 per unit. In that case, the investor will receive Rs. 2 as income and the NAV will decrease by the same amount, making it Rs. 98, representing the capital withdrawal.
IDCW plans’ primary drawback is that they gradually reduce the investor’s capital over time. This means that the amount of money invested in the mutual fund scheme decreases with each dividend payout. While, in a growth plan, the investor’s capital remains invested and continues to grow over time which gives higher returns in future.
To conclude, SEBI’s renaming to IDCW plans aims to provide greater clarity to investors. However, it is important for investors to consider their investment objectives before choosing a plan that best suits their needs. While IDCW plans offer regular payouts to investors, the reduction in the NAV due to payouts may not make them the most ideal option for all investors.