IDCW vs SWP - Meaning, Differences & Use Cases

Investors often seek mutual fund options that provide regular source of income whether for retirement planning, systematic cash flows or financial flexibility. Two popular methods to generate such income are IDCW (Income Distribution cum Capital Withdrawal) and SWP (Systematic Withdrawal Plan). While both aim to provide periodic payouts, they differ in how the cash is generated, how it impacts your investment and the level of control an investor has. Understanding these differences is crucial for choosing the option that best aligns with your financial goals

Key Takeaways

• IDCW payouts are decided jointly by the AMC and the Trustee and may vary over time. Distribution of IDCW is subject to the availability of distributable surplus. In contrast, SWP withdrawals are fixed, subject to available corpus
• IDCW reduces the NAV of your investment whereas SWP reduces the number of units held
• SWP offers more control and flexibility over cash flow, timing and amount
• IDCW is taxed at the investor’s slab rate while SWP withdrawals are subject to capital gains tax based on the units redeemed
• Investors planning for retirement or consistent cashflows may find SWP more suitable whereas those preferring occasional payouts with minimal involvement may opt for IDCW

What is IDCW in Mutual Funds?

IDCW (Income Distribution cum Capital Withdrawal) is a mutual fund feature where a portion of the fund’s income along with part of your invested capital is distributed back to you. This means investors receive a share of profits generated by the fund along with a return of some invested money. The payout is not fixed and depends on the AMC & Trustee decision. When IDCW is declared the fund’s Net Asset Value (NAV) reduces by the distributed amount. For example if a fund’s NAV is 100 and IDCW of 5 per unit is declared the NAV becomes 95 after the payout.

Investors can receive IDCW in two ways -

• IDCW Payout Option - The declared amount is credited directly to the investor’s bank account providing a regular income stream
• IDCW Reinvestment Option - The payout is used to buy additional units in the same fund at the ex-IDCW NAV increasing the total units held and enabling compounding.

What is SWP?

A Systematic Withdrawal Plan (SWP) is a smart way to generate regular cash flow from your mutual fund investments. SWP meaning refers to a plan where you invest in a mutual fund (usually in the growth option) and choose a fixed amount to withdraw at regular intervals monthly, quarterly or annually.

On the chosen date the fund redeems units worth that amount and credits the money to your bank account.

For example if you invest 10 lakh and set up an SWP of 10,000 per month the fund will redeem units worth 10,000 every month and transfer it to you. This continues until you modify, pause or stop the SWP  giving you complete control over your withdrawals.

Unlike the IDCW (dividend) option where payouts depend on the fund house declaring distributable surplus, SWP allows for regular withdrawals as long as sufficient corpus remains in the investment. The amount of cash flow depends on the remaining corpus and market performance

How They Work - Source of Cash Flow & NAV Impact?

Both IDCW and SWP aim to provide regular source of  income but the way the cash is generated and how it affects your investment is very different. Knowing this difference helps you make the right choice for your financial goals

1) IDCW (Income Distribution cum Capital Withdrawal)

IDCW payouts are made from the distributable surplus of the scheme. This surplus can come from interest, dividends and realised capital gains.

• NAV Impact  - When an AMC declares IDCW the NAV of the scheme falls exactly by the payout amount per unit because a portion of the scheme’s assets is distributed. The number of units you hold remains the same
• Investor Experience  - You receive the payout directly in your bank account (IDCW Payout option) or it is reinvested to purchase additional units (IDCW Reinvestment option) based on the options chosen by the investor.

2) SWP (Systematic Withdrawal Plan)

SWP creates income by redeeming a certain number of units based on the withdrawal amount you choose.

• NAV Impact - The NAV itself does not change because of your withdrawal. Instead your unit balance reduces after each redemption and future gains are earned on the remaining units
• Investor Experience - You choose the amount, date and frequency of withdrawal and can change, pause or stop the SWP anytime. This makes cash flow predictable and fully under your control

IDCW vs SWP - 7 Key Differences

Aspect	IDCW (Income Distribution cum Capital Withdrawal)	SWP (Systematic Withdrawal Plan)
Who Decides Payout	AMC/Trustee decides when and how much IDCW to declare based on available distributable surplus	Investor decide the withdrawal amount, frequency and start date
Impact on NAV	NAV reduces by the amount of IDCW declared per unit.	NAV does not change due to withdrawal. Instead units are redeemed to match the chosen withdrawal amount
Units Held	Units remain unchanged. You still hold the same number of units but at a lower NAV	Units decrease with each withdrawal since they are sold to generate the payout
Cash Flow Control	Cash flow is unpredictable you may get more, less or no payout depending on scheme performance and AMC’s decision	Cash flow can be predictable subject to the availability of the corpus
Effect on Corpus	Corpus falls because the NAV drops after payout even though units remain the same	Corpus falls because your unit count reduces after every withdrawal though remaining units still participate in market gains
Taxation	Taxed at individual’s slab rate	Capital gains taxation (STCG/LTCG) applies only on withdrawn units
Flexibility	No control over payout size/timing	Full flexibility to modify, pause or stop

 

When Might Investors Consider IDCW or SWP?

• IDCW (Income Distribution cum Capital Withdrawal) – Suitable for investors who prefer a hands off approach and are comfortable with payouts that vary according to the AMC’s discretion
• SWP (Systematic Withdrawal Plan) - Suited for those seeking regular, predictable cashflows, greater control over withdrawals and potential tax efficiency making it particularly useful for retirement planning

Conclusion

Both IDCW and SWP offer ways to generate regular cashflows from mutual fund investments but they serve different investor needs. IDCW is more suitable for those who prefer a passive approach and are comfortable with variable payouts determined by the fund house. In contrast SWP provides predictable, flexible and investor controlled cash flow making it an effective tool for retirement planning or any situation requiring steady withdrawals. Understanding how each option impacts NAV, units held and taxation helps investors align their choice with their financial goals

FAQs

1. What are the main differences between SWP and IDCW?

SWP is an investor controlled redemption plan while IDCW is a payout declared by the fund house

While SWP is generally preferred for retirees due to its predictable and flexible cash flow, the choice ultimately depends on the investor’s individual needs, financial goals and comfort with market fluctuations or AMC determined payouts.

2. Can SWP or IDCW be adjusted according to changing financial needs?

SWP can be modified anytime whereas IDCW depends on the fund’s declaration schedule.

3. How are SIPs different from SWPs and IDCWs?

SIP is about investing regularly while SWP and IDCW are about withdrawing or receiving income from existing investments.

4. Does either option change my total returns?

Yes, both reduce future compounding potential since cash is withdrawn but SWP allows controlled withdrawals.

5. Why does the NAV fall after a payout or withdrawal?

When a mutual fund declares an IDCW a portion of the scheme’s assets is distributed to investors. Since NAV represents the per unit value of the fund’s assets it falls by the payout amount.

6. Can I switch from IDCW to SWP or vice versa?

Yes, you can switch by submitting a request to your AMC.

 

Disclaimers

Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.

These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation.  The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

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