It is no longer Dividends in MFs, it is IDCW
Posted By: Admin
From 1st April 2021 onwards, SEBI has mandated all the Mutual Fund houses to rename their dividend schemes as IDCW meaning Income Distribution Cum Capital Withdrawal. This was a long time in waiting and a good move in line with the best practices surrounding the MF industry.
Dividends in stocks means retained profits of the company distributed to shareholders. However in the Mutual Funds Dividends are distributed from a central pool where identification of profits exclusively is difficult. Also since dividend declared in MF results in the reduction in the NAV of the MF, it is not strictly dividends and it can also be partly construed as capital withdrawn. The problems also pertains to investor perception that in MFs the dividends esp in Balanced and Balanced Advantage Funds were sold with the promise of consistent dividend ( in a volatile equity based asset a promise of consistent dividend is only possible by partly return of capital periodically).
Since dividends are taxable in the hands of the investors and therefore the amounts declared as income distribution by the MFs will be taxable in the hands of the investors. The MFs have to show how much of their distribution is from profits and how much is capital distribution. All this makes the dividend distribution in MFs in the future a little difficult.
More and more MFs would shy away from declaring dividends due to the taxation and cumbersome process to be followed.
So investors in Dividend payout options should consider converting to growth option and seek systematic withdrawal for their outflows. This would be more tax efficient and predictable as well in the future.
Category Finsherpa | Tags Financial Freedom
