Investors often come across the term liquid mutual fund dividend while comparing different liquid fund options. However, mutual funds in India now commonly use the term IDCW (Income Distribution cum Capital Withdrawal) instead of the older term “dividend.” Understanding how IDCW works can help investors make better decisions when choosing between Growth and IDCW options.
What Is Liquid Mutual Fund Dividend?
A liquid mutual fund dividend, now generally referred to as IDCW, is a distribution made to eligible investors from the distributable surplus of a mutual fund scheme.
It is important to understand that IDCW is not guaranteed. The fund does not have to distribute money at a fixed rate or on a fixed schedule. The declaration depends on the availability of distributable surplus and the decision of the trustees.
Therefore, investors should not treat IDCW as guaranteed interest similar to a fixed deposit.
How Does IDCW Work in Liquid Funds?
When a liquid fund declares an IDCW, eligible investors may receive the distribution according to the option selected.
There can generally be two ways of receiving it:
- IDCW Payout: The declared amount is paid to eligible investors.
- IDCW Reinvestment: The declared amount is reinvested into the mutual fund according to the scheme's rules.
The exact options and frequency available can differ between schemes, so investors should check the latest Scheme Information Document before investing.
Does NAV Fall After IDCW?
Yes. One important point about liquid mutual fund dividend or IDCW is that the scheme's NAV is adjusted after an IDCW distribution.
For example, suppose a fund has an NAV of ₹100 and declares an IDCW of ₹2 per unit. The NAV would generally reduce by the amount distributed, along with any applicable statutory levy. AMFI scheme documents explain that the NAV is adjusted to the extent of the IDCW distribution on the record date.
This means IDCW should not be viewed as “extra free returns.” Part of the scheme's value is being distributed to investors.
Growth vs IDCW Option
When investing in a liquid mutual fund, investors may come across Growth and IDCW options.
In the Growth option, earnings remain invested in the scheme and are reflected through changes in the NAV.
In the IDCW option, the scheme may distribute an amount when the trustees declare IDCW, subject to the applicable rules and availability of distributable surplus.
For investors who do not need periodic distributions, the Growth option may be simpler because there is no need to depend on IDCW declarations.
Is Liquid Mutual Fund IDCW Guaranteed?
No. This is one of the most important things beginners should remember.
A mutual fund cannot promise a fixed IDCW amount or regular distributions. Current scheme documents state that there is no assurance or guarantee regarding the rate or regularity of IDCW.
The amount and frequency depend on the scheme's distributable surplus and applicable regulations.
Should You Choose IDCW for Short-Term Investment?
The answer depends on your financial objective.
If your main purpose is to keep surplus money invested for a short period and you do not require periodic distributions, you should compare the Growth and IDCW options based on your needs.
Do not select a fund simply because it has previously paid IDCW. Past distributions do not guarantee future distributions.
You should also consider the fund's portfolio, risk level, expense ratio, liquidity and investment objective.
Final Thoughts
The term liquid mutual fund dividend is commonly used to describe what is now generally called IDCW. It represents a distribution that a mutual fund may make from its distributable surplus, but it is not guaranteed.
IDCW can be paid out or reinvested depending on the option selected. Since the NAV is adjusted after distribution, investors should understand how the payment affects the overall value of their investment.
Before choosing a liquid fund, compare the Growth and IDCW options carefully and check the latest scheme documents for current rules, distribution policies and applicable taxes.
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