Mutual fund 'dividends' aren’t income: They’re your own money coming back to you

Think mutual fund “dividends” are a bonus payout? Think again. What many investors believe is extra income is actually a slice of their own money — and misunderstanding it could derail their financial planning.

Chakrivardhan Kuppala, writing on LinkedIn, unpacks a common misconception: mutual fund dividends aren’t windfalls, but a return of capital. “It’s actually a part of your own investment being given back to you,” he notes. To clarify this, SEBI in 2021 rebranded such payouts as IDCW — Income Distribution cum Capital Withdrawal.

The renamed options now fall into three categories:

IDCW Payout: Investors receive regular cash into their bank accounts. Ideal for those needing steady income — such as retirees or anyone with limited cash flow. Under the new tax regime, this payout could be tax-free if total income is under ₹12 lakh.

IDCW Reinvestment: Here, the dividend is not withdrawn but reinvested to purchase more units of the mutual fund. While not immediately rewarding, it grows the investment base. Taxes apply when the investor finally redeems the units.

Growth Option: The entire investment remains untouched and compounds silently over time. There are no payouts, but potential long-term gains are higher. Taxes kick in only upon withdrawal, but the strategy could deliver more wealth over time.

Kuppala’s key message: none of these options is inherently better — but choosing the wrong one for your goals can cost you. “What do you want your money to do for you — grow quietly, or pay you regularly?” he asks.

For those targeting long-term compounding, growth and reinvestment options may align better. For income-seekers under ₹12 lakh, IDCW payouts can offer liquidity with tax efficiency.