Imagine turning your mutual fund investments into a steady stream of income—like a salary but powered by your own portfolio. While mutual funds are traditionally viewed as long-term wealth builders, they can also serve as reliable tools for generating regular cash flow, especially during retirement or when supplementary income is needed. Two popular strategies—Income Distribution cum Capital Withdrawal (IDCW) and Systematic Withdrawal Plan (SWP)—offer distinct ways to access your investments.
Mutual funds can provide regular income through non-guaranteed distributions from fund surplus via IDCW and flexible, investor-defined withdrawals through SWP. However, it’s important to remember that neither option offers fixed returns—both are influenced by market performance. Let’s explore how IDCW and SWP work, and how they can be tailored to meet your financial goals.
Income Distribution cum Capital Withdrawal (IDCW)
IDCW is the new term for what was earlier known as the Dividend Plan. Under this, mutual funds may distribute a portion of the scheme’s distributable surplus, which includes realized gains, income equalization reserves, and accrued income. The fund managers decide how often and how much you get a payout based on the scheme’s performance and available reserves.
You receive IDCW only when the mutual fund scheme has a distributable surplus. These payouts are not guaranteed and can vary depending on the fund’s performance and available reserves.
There are two types of IDCW:
- Regular: You may receive payouts monthly, quarterly, or annually, depending on the scheme.
- Growth: In the growth option, earnings are reinvested into the scheme, enhancing compounding.
Systematic Withdrawal Plan (SWP)
An SWP lets you regularly withdraw a predetermined amount from a mutual fund scheme. Units from your portfolio are sold on a designated date, and the funds are transferred directly to your account.
For example, you invest Rs.40 lakhs through a mutual fund and choose a SWP of Rs.30,000 each month. Based on the current NAV, the fund sells units valued at Rs.30,000 and deposits the amount directly into your bank account on the decided day.
There are two types of SWP:
- Fixed Withdrawal SWP: You can choose how much and how often you want to withdraw.
- Appreciation Withdrawal SWP: You can only withdraw the profits from your investment while leaving your initial capital untouched.
Brief Comparison of IDCW and SWP incomes
Here is a brief breakdown of IDCW and SWP – based on which you can decide which one suits your needs:
| Features | IDCW | SWP |
| Authority | Fund manager decides | You (Investor) Decide |
| Cash Flow | Relies on the surplus in the fund | Fixed and predictable, based on investor’s instructions |
| Flexibility | Limited | High (you can change the terms anytime) |
| Tax | As per your tax slab | Taxed Capital gains |
| Best for | Supplementary income | Fixed income |
Pros of IDCW and SWP
| IDCW | SWP |
| You get a supplementary income | You get a fixed income |
| You receive regular payouts without redeeming your units, which can be useful for generating cash flow while staying invested. | You control how much and when you withdraw |
| Tax efficient if you fall under a low tax bracket (taxed at your income tax slab) | Your capital appreciates, if your withdrawals are less than your returns |
| Tax efficient (capital gains tax at 20% with indexation) |
Cons of IDCW and SWP
| IDCW | SWP |
| The NAV (Net Asset Value) of the fund reduces after redistribution | Withdrawals continue despite market conditions, which can eat into your capital over time if not planned carefully. |
| Inconsistent payouts, risk of not receiving any returns in case of no surplus | You stand to risk your capital, if your withdrawals are higher than your returns |
| Dividends aren’t profit. In dividends, you get a percentage of your investment back, instead of reinvesting it. This may impact your compounding benefits. |
Which one should i opt for?
Go for IDCW if:
- You don’t want to sell your units and are OK with receiving occasional payouts.
- You’re in a lower tax bracket, the impact of IDCW tax is quite minimal, as it is taxed as per your slab
- You want a bonus-based strategy.
Go for SWP if:
- You want a consistent and fixed income stream.
- Your priority is managing your cash flow.
- You are in a higher tax bracket, then SWP may be more tax-efficient, as only the capital gains portion of each withdrawal is taxed—typically at 10% (LTCG) or 20% with indexation for debt funds.
- You want a consistent and structured income from a big sum without locking it up in low-return securities.
Case study for both options
Let’s imagine you have Rs.60 lakhs to invest when you retire at 60. You choose to invest that money through a conservative hybrid mutual fund.
- Under IDCW, you can get dividend payouts of Rs.8,000 in one month or Rs.6,000 in the next, or nothing for a few months. Under IDCW, payouts depend on the scheme’s distributable surplus, which includes income accruals, realized profits, and reserves. Hence, payouts may vary or be skipped entirely if no surplus exists.
- Under an SWP, you will get the amount you agree to withdraw every month (say Rs.15,000), regardless of the market conditions
IDCW and SWP provide useful options to generate income from mutual fund assets, but they operate in quite different ways. Ultimately, the best option depends on your income needs, investment horizon, and tax status. A clever blend of the right fund and withdrawal strategy might allow you to enjoy your investments while they continue to work for you.