The Securities and Exchange Board of India implemented a new regulation with effect from April 1, 2021, wherein the nomenclature of ‘Dividend’ in Mutual Funds was changed. Now, instead of ‘Dividend’, it is simply referred to as ‘distribution’; and what used to be called the ‘Dividend Plan’ is now called the ‘Income Distribution cum Capital Withdrawal Plan’ or IDCW Plan.
This brings about a significant change in the way mutual fund investors view the returns they are likely to receive on their investments. Income distribution plus capital withdrawal plans in mutual funds are a way of giving investors access to their investments while also allowing them to benefit from the appreciation of their underlying assets.
Mutual funds offer an array of options when it comes to income distribution and capital withdrawal plans, allowing investors to customize their investments to fit their individual needs. In India, this type of investment is becoming increasingly popular, with a wide range of products available to investors.
What are the advantages of income distribution cum capital withdrawal plans?
Flexibility: One of the main advantages of income distribution cum capital withdrawal plans is the flexibility they offer. Investors can choose to invest a fixed amount of money on a regular basis, or make lump-sum investments.
They can also choose to withdraw their funds as needed, allowing them to make use of their money in the short-term while still benefiting from the potential long-term growth of their investments.
Diversification: Another advantage of these plans is the diversification they offer. Most plans allow investors to invest in a variety of asset classes, including stocks, bonds, and other securities. This helps to spread out the risk and maximize returns.
Low Cost: Most income distribution cum capital withdrawal plans are relatively low cost, making them an affordable option for those on a budget.
How are IDCW plans different from growth plans?
The investment distribution cum capital withdrawal (IDCW) plan and the growth plan are two different mutual fund investment options. The IDCW plan allows investors to withdraw a portion of their profits from the scheme periodically, while the growth plan does not.
In the IDCW plan, the investor can choose to receive payouts either partially or fully at the discretion of the fund manager/AMC. These payouts may be in the form of dividends, bonus units or capital gains.
In the growth plan, the profits made by the scheme remain invested in the scheme. This allows the investor to benefit from the power of compounding over a longer period of time, thereby leading to wealth creation.
The IDCW plan also has the disadvantage that there is no guarantee of IDCW payouts. This means that the investor could end up receiving fewer payouts than expected. Furthermore, since the payouts are distributed periodically, they are subjected to taxation as they are received. This could result in a higher overall tax liability for the investor.
Therefore, when choosing between the IDCW plan and the Growth plan, investors should consider all the pros and cons carefully. If their investment objective is capital appreciation or long-term wealth creation, then the Growth plan is the better option. On the other hand, if the investor wants regular cash flows from their investments, then the IDCW plan might be the better choice.
It is important to understand the pros and cons associated with these plans before investing. By carefully considering all the factors involved, investors can make sure they are making the best decisions for their individual needs.
