IDCW Vs SWP: What's More Useful For You? | All You Need To Know On The Mutual Fund Show
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00:00Hi, thanks so much for joining in. You're watching the Mutual Fund Show on NDTV Profit
00:12and my name is Alex Mathew. Like the name suggests, this show gets you updates on everything
00:17mutual fund related and essentially it aims to give you actionable insight so that you
00:23can make your investments into mutual funds with confidence. Now, before we get started
00:28on the topic for today, I would like to give you an update. In fact, you will be able to
00:33read it on the website as well. That's NDTVprofit.com and that is that the systematic investment
00:40plan could well be on the way towards getting smaller. Currently, the minimum threshold
00:46is 500 rupees per SIP. You might just be familiar with that. But the SEBI has been working with
00:52the mutual fund industry towards bringing it even further lower. In fact, lowering
00:58that threshold to 250 rupees and we've actually heard from the SEBI chairperson that the SIP
01:07value is going to be reduced to 250 rupees by Aditya Birla Sun Life Mutual Fund and it
01:13could well be followed by other mutual funds as well. So that's certainly something to
01:17look forward to. Now, today's conversation has to do with a couple of abbreviations and
01:24it's IDCW and SWP and if that sounds a little complicated, I won't blame you but the reality
01:34is that it's actually quite simple. It has to do with the disbursement or the distribution
01:42of funds from investments that you make into mutual funds. There are two options available
01:47to you when you want to receive what is earned by the mutual fund that you're investing in.
01:54We'll talk about that in more detail and which situations call for which type of withdrawal.
02:01We've got Praveen Bajpai, founder of FinFix Research and Analytics and Shitej Mahajan
02:06who is a managing partner and chief executive officer of Complete Circle Wealth Solution
02:11joining me today. Thank you so much to the both of you for taking the time and as always
02:15it is a pleasure having you on the program. Praveen, let's start with IDCW and the definition
02:24was changed by the SEBI from dividend to IDCW which is income distribution cum capital withdrawal.
02:33First of all, why was that done and what does IDCW mean?
02:38Good afternoon Alex and hi to Shitej. Yes, in April of 2021, Alex, this change was made
02:47because typically and technically speaking, there has never been a dividend in mutual
02:53funds. For example, in stocks when a dividend is announced, it is from the profits of the
02:58company and that is over and above whatever stock holdings the investor has. In case of
03:04mutual funds, it was always a part of the capital appreciation which was there for the
03:08investor and I think which was misleading. So, there was never a dividend, it was always
03:13distribution but it was called the dividend option. And in 2021, the nomenclature was
03:20changed and like you said, it became the income distribution cum capital withdrawal plan.
03:26Why it was done Alex? Many mutual fund investors misunderstood that the dividend was like a
03:33bonus which was over and above the returns that they were getting from the scheme or
03:37whatever the scheme was delivering. And I think it led to confusion, it was misleading
03:42people investing in the dividend option to get this extra bonus what they thought is
03:48being given under this plan. And what was actually being done was that a part of your
03:54own appreciation is given back to the investors and I'll give you an example here just to
03:59explain this. For example, an investor has about 10,000 units of a scheme and a dividend
04:08of rupee 1 is declared. So, the investor because he has 10,000 units, rupee 1 per unit, so
04:16the investor gets about 10,000 rupees. Now, for example, the NAV of this scheme was 20
04:23rupees. What happens is as soon as the dividend is declared, the NAV of this scheme will fall
04:30back to 19. So, that 1 rupee is actually adjusted from the appreciation which was there in the
04:36scheme and it was never over and above. And that is why this change in nomenclature but
04:40it is still a way to get some returns back from this scheme. And of course, there have
04:45been changes in the taxation in how the dividends are received at the end of the investor. And
04:51there is no schedule or there is no laid out plan that dividends will be let's say given
04:58every quarter or once in a year. It really depends on the scheme, it depends on the discretion
05:03of the fund house and there is a lot of variation and variability in this whole process. But
05:09this is how the dividend plan works. Now, what is called as the IDCW.
05:14We will talk about certain conditionalities in which situations it works in. But let us
05:20talk about Shetij, the other example. So, let us talk about growth versus IDCW which
05:26is what we normally talk about. And we are talking about income distribution and Praveen
05:31explained it really well to say that it is a method for a regular distribution of whatever
05:40is earned by the mutual fund scheme. In the growth option, on the other hand, you have
05:45a reinvestment of the proceeds that you get and you allow that appreciation to take place
05:51over a period of time. Could you speak to us about the pros and cons of IDCW?
05:59Well, hi Alex, hi Praveen. Always a pleasure. So, it is very well explained by Praveen how
06:06IDCW or what we used to call dividend option works. So, yes, till the time you used to have
06:13your dividend proceeds which are not taxable or let us say they used to get some benefit of that,
06:19then it makes sense. But as we speak, I think growth option for a wide range of people is much,
06:27much, much more simpler and much more useful because anything which you are taking as a
06:34withdrawal and it is a combination of your principal and appreciation amount and you have
06:39tax which is 12.5% on a long-term side goes on only growth option in equities. And if it is fixed
06:45income also and you have past two years and you are doing let us say SWP or withdrawing money,
06:50it is again 12.5% now. So, yes, people who are not in any tax bracket or who are in a very low
06:58tax bracket, I think IDCW works for them. Second, IDC works for those people where you do not need
07:06a certainty of income because yes, you have certain schemes which are regular in paying
07:12dividends because right now I think markets are good and that is why you have growth coming,
07:18you have profit coming in the pool of mutual fund schemes. But that is not how it is going to remain
07:25all your investment journey. So, sometime when you do not have a profit pool from where the
07:31fund manager will distribute the dividend. So, at that time I think if you need a certainty of
07:36income, then I think IDCW is not a right option, then SWP is really a better option.
07:42And people who are in much, much higher tax bracket which is more than 10%,
07:48IDCW is not friendly. As I said, because this becomes, the withdrawal becomes a part of your
07:56income and it is being taxed on a nominal rate of taxation on which you are paying your taxes.
08:03So, at that time, I think growth option is a better way of looking at it. Again, if you just
08:10think that because you want to withdraw the money which has been appreciated as a part of income,
08:16then again, I do not suggest IDCW because you are eventually, you are actually not lying,
08:23your compounding works for you. If you have time on your side where you do not need
08:28withdrawals and you need withdrawals over a period of time, then I think just wait for
08:33compounding to happen to your investments. And once you need the funds, go for a certainty option.
08:38So, these are broader places where growth anyway has edged over IDCW.
08:49The only place where IDCW has edged is where people who are investing and opting for IDCW,
08:56they are not falling in or they are falling in less tax bracket or a very low tax bracket.
09:01That is something where one can look at. Yeah, that is a fair point. But the two
09:06key takeaways from what you have said and what Praveen has said is that
09:09there is no clarity on when this will be distributed. So, you are waiting for the
09:15mutual fund house to decide that it will distribute. And the other aspect is the
09:20tax treatment of it which is not really very feasible. So, from that perspective, what I am
09:25getting is that the better option to choose is the growth option in whatever you are investing in.
09:31And in SWP, which is a systematic withdrawal plan and here we are talking about those
09:38individuals that would need regular income over a period of time. So, let us lay out an example
09:44Praveen and then explain how SWP or systematic withdrawal plan works. You have invested over
09:50a period of 20 years or 25 years and you have reached a point where you are 60, 62, you want
09:57to withdraw a certain amount of money on an ongoing basis for your regular expenditure. So,
10:04you choose to do a systematic withdrawal plan. How would this work? Right, Alex. Like
10:10Ashutosh has mentioned that, you know, it is better to invest in the growth option and then
10:14when you want to start withdrawing, which is sort of the opposite of SIP. So, all throughout our
10:19investment journey, we put in money and we are buying units. And when we want that regular money
10:26to come in, let us say, in the first week of every month, we can set up a SWP, systematic
10:31withdrawal plan and the opposite starts happening. For example, let us say at 60, I require 50,000
10:37rupees a month. We set up an SWP and that can be with the amount, I think, because that is,
10:43so there are different variations which are available. For example, you can even set it up
10:48as units. But if we go with more predictability, it is best to set up your SWP with a certain
10:53amount. So, let us say we set it up at 50,000 a month that I have to get. So, for example,
11:00on the first time, you know, when the withdrawal is being done, the NAV of your unit is, the scheme
11:07is about 100. So, about 500 units because you want 50,000 divided by 100. So, about 500 units
11:14from your mutual fund scheme will be sold and the money will be given to you. Now, this money, Alex,
11:20which is coming to us, you know, it will not be just the principal or just the appreciation,
11:25it's going to be a mix of the two. Because when those certain number of units are sold,
11:29those 500 units are sold, for example, in this case, there will be some part which is appreciation,
11:35there will be some part which is coming back to you as your principal. So, the taxation becomes
11:41easier because whatever is coming to you, your principal coming back to you is not taxed,
11:45only the appreciation amount is taxed. And I think with this, you can have more predictability,
11:51you have more flexibility. For example, let's say for the first six months, I want 50,000 every month,
11:56maybe later I realize that that is not what I require and I can set it and reduce it back to,
12:01let's say, 40,000 a month. So, you have the flexibility to increase, decrease, even pause it,
12:07which you will not have in case of a dividend. If you don't require dividends, you can't
12:11sort of stop those dividends from coming to your account. So, I think SWP will give you
12:16the predictability, it will give you more flexibility and freedom to set up the amount
12:20that you require. What we really need to watch out for about, be careful about in case of an SWP is
12:26at what pace are we withdrawing? Because that can start eroding your corpus and that is what we plan,
12:32you know, during your investment journey, that is how, you know, we plan that this is the target
12:36corpus and at what withdrawal rate, you know, will you be able to, let's say, suffice for the
12:41next 30 years or 40 years of your retirement. So, that's broadly how the SWP option works,
12:47but the tax treatment in this case will also depend on the scheme. Yeah, yeah. And the asset.
12:53Absolutely. And we talk about that. I'm glad that you pointed out at the end about how to plan this
13:00because we lay that out as well. I have another question, which is that, Shruthi, if you are,
13:06and there's a third option, right? If you have investments in mutual funds and if it is a growth
13:10option, you can choose to just withdraw how much ever you want on an ongoing basis. Ultimately,
13:16you're just waiting for the settlement to take place. And if we're going towards what the SEBI
13:21and the SEBI chairperson have said is that we're moving towards a T plus zero settlement. So,
13:26you could well see or envision a future where you could, you know, sell units in a mutual fund
13:32scheme and receive it on the same day. So, is there a drawback to just withdrawing or is it
13:37better between just withdrawing and using a systematic withdrawal plan, you know,
13:43using systematic withdrawal plan instead? I think you might just be on mute.
13:52My bad. I'm sorry. Yeah, I totally agree that, you know, just to take the discussion forward,
13:58what Praveen has said. I think there is a drawback when you just think that today I need
14:04some funds and whenever I need the fund, I can just settle it and ask for it. Because at that
14:10day, you might end up withdrawing from one fund only. While SWP as a discipline, you can actually
14:16stagger it across funds rather than just having one fund only. So, one is this. Second drawback,
14:22which is there is that whenever you're in a need of money and need of a fund, obviously, nowadays,
14:28you have all these online transactions which make things and life much easier. But then
14:35that should be used as an element of top up in terms of your monthly withdrawals rather than just
14:40the withdrawal, you know, on that day, whenever you require the fund, you should be doing. So,
14:45I think as we say that, you know, as a lump sum investment versus like withdrawal is also
14:52like lump sum versus SWP. So, anyway, when you withdraw across schemes, the impact is much lesser
14:58and you see some pie from some units from each scheme has been withdrawn. So, not one scheme is
15:02affected. But when you withdraw per scheme, the entire funds from one scheme, I think that is
15:08when, you know, where one scheme gets affected more because of these other schemes. So, I think
15:13there is an even withdrawal is what we as a house suggest that one should do. Second part,
15:21which is very relevant in this case is that, you know, when you have a discipline, what SWP is for,
15:28that when you say, okay, fine, I have some corpus which is with me and I want to do this corpus and
15:34at the same time, I want to enjoy the benefit of compoundings because I have reached that
15:39compounding part, I should do this. So, you know, and then you start withdrawing and then as and
15:45when you need some more funds, then you use this facility what you're mentioning. Otherwise, I
15:49think a staggered way of withdrawing from across a scheme or across a portfolio is a better way of
15:56doing things. That's a fair point. Praveen, just to follow up on this and by the way, after we're
16:01done with this conversation, we're going to take a few of the queries that have come through from
16:06some of you and you see that number that is flashing on your screen. If you've got a specific
16:10question on mutual funds, then do write to us on that number and we'll take it up either today
16:15or over the course of the coming few days. But Praveen, my question is that while SWP
16:22or Systematic Withdrawal Plan is a powerful tool, is there a specific way that you envision it to
16:31be used? And let me clarify that question. Suppose you have investments in equity as well as hybrid,
16:39as well as debt mutual fund schemes, is it better to do an SWP in the debt schemes and
16:46allow the equity schemes to compound over a period of time? Alex, ideally, this answer would depend
16:56on what kind of a portfolio requirement the investor has. But if you're looking at withdrawal
17:01from debt, the withdrawal rate will have to be very, very low and the converse will have to be
17:06very huge because we are not looking at a very high growth there. But in case of I think hybrid
17:12becomes a good category to start investing from or the large cap funds. And I'll give you an
17:16example here, Alex. For example, somebody is 60 today and wants to start withdrawing by 65,
17:22because it's always recommended that you invest three to five years before you start withdrawing
17:27and let's say would live till 90 years. At 6% inflation, Alex, today expense of 1,50,000 a
17:34month will become about 2,00,000 by the time they are 60. And if they have to manage till 90,
17:41they will require a corpus of about 6 crores. So, it can be a mix of different assets. We are not
17:47taking a very high withdrawal rate, but I think that having your hybrid funds and large caps can
17:54be a good option if you start withdrawing after three to five years. And your debt funds, if you
17:58haven't done that, then your debt funds can be used as a parking place for your initial two or
18:05three years of expenses where you can do a SWP, but the depletion will be fast there, Alex. Unless
18:11and until the corpus is really, really huge. And I think given the fact that we have to fight
18:16inflation during our retirement as well. For example, in this case, in five years only,
18:21the expense has gone up by 50,000. And during the next 25 years of retirement, it would keep
18:26growing. Inflation will not spare a retiree. So, I think it's best to have the hybrid component,
18:31the large cap oriented for SWPs, and have your debt funds for your contingency and other safety
18:36nets. I would like to go with that kind of strategy. That's a fair point. And hopefully,
18:41we've clarified a lot of these aspects. Now, let's jump into the queries. And we've got
18:46a question from Adarsh. And he's asking, he wants to invest 1 lakh per month over the next
18:54three years. And he's particularly looking at the ICICI Prudential Mutual Fund schemes.
19:02He's 33 years old. I'm guessing he's talking about equity mutual fund schemes. And
19:07I'm guessing Shitej S. Narain will be quite happy to hear about this because he seemed to have made
19:12an impact with Adarsh at least. While you're answering this, could you also talk about the
19:18kind of style that is employed by this fund house? So, I'm sure ICICI guys have been doing a
19:25great job. But at the same time, I need to understand, and you answered half of it that
19:30you should participate in different styles, you should participate with different houses.
19:34And I'm not asking you to do 10 mutual funds, but at least have 4 to 5 different styles which
19:39are there. Broadly, Narain's style is more of a value style. They do have fund managers which
19:44are on the growth style. And they are now working on, many of the schemes are working on
19:50factor investing also on the next side. But in a nutshell, I would like to say that
19:55ICICI is a great house. You should maybe pick a couple of schemes from there. At the same time,
20:00just add different styles of growth and as well as factor investing. There are certain good
20:07fund houses, others than ICICI also, which you should include. Maybe a contrarian strategy in
20:13your portfolio and make a good portfolio of a flexi-cap, multi-cap, momentum large cap,
20:19and larger mid-cap style. If you have this capital which is on the higher side, you can
20:26look at adding one sectoral bed. For sure, not defense, not PSU, and not any railway bed. But
20:34yes, you can look at manufacturing or maybe a banking. I like these two sectors. That's my
20:40personal view. You can do your research. There's no recommendation here. To that end, not a
20:46recommendation, but just having looked at these schemes for so many years, which out of the
20:53stable of ICICI prudential mutual fund schemes, equity or otherwise, do you like? I like India
21:01Opportunity a lot. That's been managed by Naveen himself. Their value discovery is their flagship,
21:06but I like India Opportunity a lot. It's a value theme, but they have a good mix of some
21:16growth stocks also. Many of the growth stocks are now value stocks on a light note, like HFC
21:21banks of the world. They've become like value stocks as we speak, but I like this scheme a lot.
21:28Okay, here's an interesting question, and Jai's got this question. He's talking about a loan
21:33against a mutual fund, and he's considering utilizing his mutual fund units as collateral
21:41in order to take a loan of one crore, and this is after a property deal fell through, he points out.
21:48He's 43 years old. Is this a good idea in the current market? And also, who should he consult?
21:57He's asking about this. But Praveen, I will take this question to you on the first question.
22:03What should you bear in mind in such a situation?
22:08Investing with borrowed money is not a great idea, Alex. So I would upfront discourage Jai
22:13from doing that. He's saying that the land deal didn't go through or the property deal didn't
22:19go through, but perhaps if it is on the cards and in the next year or two years again, he would be
22:25requiring the amount, the loan amount that he has taken, then it's best not to invest this money
22:31in the markets. Or even if he's investing, for example, that should be in a very safer kind of
22:37a low-risk fund. That would be my advice. And given that he's still thinking whether he has
22:43to go between an RIA or a mutual fund distributor, I'm not even sure whether he has a portfolio,
22:48which is already there. Perhaps he shouldn't have been asking this if he has a portfolio.
22:53But I think he should go to an advisor if he knows a good distributor who is knowledgeable
22:58about the markets. I think either way, if you're doing a good job, I don't think that the
23:03designation here really matters. But I feel that his question appears that he's not very experienced
23:09in the industry itself currently. And I would say that he shouldn't take the risk of investing with
23:15leveraged money. No, absolutely, Praveen. In fact, I misread the question. I thought he was talking
23:20about a loan against mutual fund units, but he's actually talking about investing a loan of one
23:25crore. Please, I mean, Jai, I can answer that. Please don't do that. Don't borrow and invest.
23:30That's not the right way to do things. Digvijay is asking this next question. He's 29 years old,
23:36and he's saying that he's investing 15,000 rupees per month across three funds. He's asking whether
23:42he should add another fund to achieve a target of four crore by the time he turns 50. Sridharji,
23:48you've kind of answered this question already to have a pretty diversified investment portfolio.
23:55He's investing in Canra Rebeco, Small Cap. He's investing in Kotak Equity Opportunity and UTI
24:01Nifty 50 Index Fund, which is actually quite a nice mix. Would you suggest that he should add
24:07something more to this? Maybe a couple of maybe one fund he should add. It's already very diversified.
24:14Three funds are there. Maybe one house on a multi-cap side. He can just pick. They are good
24:19multi-cap funds across schemes and he can just pick one multi-cap fund, which will give him a
24:24fair participation of big and small cap because any multi-cap fund needs to have at least 25%
24:30allocation to more large, big and small. That's why the functionality of the scheme they have to
24:37maintain. He'll get some exposure on that side also. At the same time, my request to him and
24:44anyone who's investing into, like you keep on stepping up your expenses, one should keep on
24:50stepping up their investments also. I think the difference of SIP versus step-up SIP is huge.
24:58As and when you have some increments coming your way, if you're working and you're selling
25:01increments, if you're in business, whenever business is doing good, just keep on stepping
25:05up your SIP and keep adding to this flavor because the morning really works and it's a magic
25:12if you see after 15, 20 years. Sometimes you see 5, 6, 7 years, 10 years, nothing happened,
25:17but that's not the time frame which you should look at. You should look at a broader time frame
25:22and you see how money multiplies. That's a very important point that you've raised.
25:28The next question that we're taking is from Rahul Surana, who says that he's 44 years old
25:33and I was just doing a quick back of the envelope calculation. He's investing 5 lakh rupees and this
25:41is a lump sum. He has invested in the Motila-Loswal Defense Index Fund. He's asking, should he hold
25:48on to this? His goal is to build a corpus of 8 to 10 lakhs in the next 5 years. The back of the
25:54envelope calculation, Praveen, that I was doing is that if he wants to reach 10 lakh in 5 years,
26:00he would have to do about 14% or thereabouts per year. The question is, does he do this in one
26:08particular scheme and this is a sectoral scheme or should he split it into other investments as well?
26:13He has already done it, Alex. It seems he says he's invested and of course he's chased the
26:18returns. So, like you said, 72 by 5 and 14% returns is what is needed to get him 10 lakhs.
26:26But I can give him an estimate on where he can be. So, for example, he's just getting
26:32lesser returns of about, let's say, 11 to 12% then he would be around 8 lakhs and if he's
26:38able to get higher, of course, he achieves his goal. But the strategy is not great, Alex, because
26:43he's invested probably looking at the returns of the HDFC Fund, which was launched much earlier.
26:49This sector has already run up so much. How much will it go or will it
26:55really deliver the CAGR 14% in the next 5 years is nobody's guess. But as the strategy is
27:01not great to invest in a thematic fund hoping for it to sort of double in a certain time period.
27:07So, if he gets a chance, maybe a year later, if he's in profits, partially redeem and then
27:13a 5-year investment with a thematic fund is as it is risky. So, he should diversify,
27:18like you mentioned, that allocation in one fund is not a great idea. But it's so difficult
27:22to give him a prediction on whether he can achieve or not. But yes, a 14% return is what
27:29can get him there. Yeah, all right. Praveen as well as Shruthi, thanks so much for joining in
27:33and for answering all the questions you did and for the insightful conversation that we had at
27:38the start. That brings us to the end of this particular edition of The Mutual Fund Show.
27:41It's been an absolute pleasure bringing it to you. Do stay tuned. Lots more coming up over
27:45the course of the day. And this is NDTV Profit.