The full form of IDCW is Income Distribution cum Capital Withdrawal. Mutual fund investor has come across this new term from April 2021 when SEBI changed the term “Dividend Option”. This is only a change in terminology as such there is no impact on investment. IDCW refer to distribution of income of a mutual fund scheme, which may include both dividends paid by stocks and capital gains made by selling underlying stocks from the scheme portfolio.
SEBI has changed the terminology because of in India there have various misconception about mutual fund dividends.
1. Dividends paid by mutual funds are actually paid by the underlying stock in the scheme portfolio.
2. Dividend received from mutual funds is extra income over and above the capital appreciation.
3. Dividend option of mutual fund schemes book profits regularly to pay dividends.
But in reality dividend received from mutual funds are not extra income or return over and above the gains investors make on redemption. That is the reason the NAV of the dividend scheme falls by the extent of dividend paid to investors.
One example can give more clarity on this topic.
Number of unit is 1000
NAV (before payment of dividend) is 10
Investment value is 10000
Dividend per unit is 1
Total dividend received is 1000
NAV (After payment of dividend) is 9
Total value of investment 9000
But if investor had invested in growth option of the mutual fund scheme, the value of his/her investment would have been 10000 instead of 9000.
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