SWP vs IDCW in Mutual Funds: The Complete, No-Confusion Guide (With Real Numbers)

 

If you’ve been researching monthly income strategies from mutual funds, you’ve probably come across two popular terms:

• SWP (Systematic Withdrawal Plan)

• IDCW (Income Distribution–Cum–Withdrawal) — previously called dividend option

And like many investors, you may be confused about which one is actually better.

Over the last few years, this has become one of the most frequently asked questions I receive. Many people compare these two options incorrectly and end up forming misleading opinions.

So, this article explains the real difference, how each option works, and most importantly, uses actual numbers from a real mutual fund to show how both strategies behave in real life.

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1. Before Anything: How Mutual Funds Actually Work

Think of mutual funds like buying shares:

• You buy units.

• Each unit has a market value called NAV (Net Asset Value).

• Your investment value = Units × NAV

But here’s the first key point:

👉 Growth option and IDCW option always have different NAVs.
This is important because SWP works on growth option, while IDCW is a separate structure.

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2. What Exactly Is SWP?

A Systematic Withdrawal Plan works like this:

• You invest in a growth mutual fund.

• You choose an amount to withdraw every month.

• To give you this money, the fund sells some units every time.

Important Characteristics of SWP

• You control how much money you withdraw.

• You choose the frequency (monthly/quarterly).

• NAV increases faster because profits stay invested.

• But every month, units keep getting reduced.

• Tax is charged as capital gains (usually 12.5% on long-term gains).

SWP feels like drawing from your own investment—because that’s exactly what it is.

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3. What Exactly Is IDCW?

IDCW is the updated name for what used to be called dividend option.

• The fund declares income per unit.

• You may either receive it in your bank (payout) or reinvest it (reinvestment).

• Units remain constant.

• Whenever dividend is declared, the NAV drops the next day (similar to “ex-dividend price” in stock markets).

Important Characteristics of IDCW

• The AMC decides the payout amount and frequency.

• Investors have no control over how much will be distributed.

• NAV tends to grow slower because money is going out periodically.

• Dividend is taxed as income, based on your tax slab.

IDCW feels like bonus income—but remember, it is still your own profits being paid out.

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4. SWP vs IDCW — A Clear Comparison

Feature	SWP (Growth Option)	IDCW (Dividend Option)
Income Control	You decide amount & frequency	AMC decides everything
Cash Flow Predictability	Highly predictable	Can vary anytime
Units	Reduce with each withdrawal	Remain constant
NAV Behaviour	Grows faster	Reduces after each dividend
Taxation	12.5% LTCG on gains	Added to income, taxed by slab
Suitability	Higher incomes, flexible needs	Lower tax slabs, passive income seekers
Fund Availability	Almost all funds	Mostly hybrid/multi-asset funds
Emotional Experience	Feels like selling capital	Feels like receiving income

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5. Real Example Using HDFC Balanced Advantage Fund

To make this clearer, let’s use real numbers from a real fund.
Assume:

• Investment date: 3 April 2023

• Amount invested: ₹1 crore

• Compared options:
  ● IDCW (payout)
  ● Growth (SWP option)

Starting NAVs on investment date

• Growth NAV: ₹324

• IDCW NAV: ₹26

Units allotted

• Growth Option: ~30,000 units

• IDCW Option: ~3,34,000 units

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6. What Happened Over Two Years?

IDCW Option

• Dividend declared: ₹0.23 per unit per month

• Monthly income: ~₹76,800

• Total dividends received in 2 years: ₹23.6 lakh

• NAV today: ₹39

• Current value:
  3,34,000 units × ₹39 = ₹1.30 crore

Growth + SWP Option

• SWP set at ₹75,000 per month

• Units reduce every month because they are sold

• NAV today: ₹516

• Units left: ~25,000

• Current value:
  25,000 × ₹516 = ₹1.30 crore

• Total withdrawn so far: ₹21 lakh

What’s the key insight?

👉 Both options gave almost the same total return (≈₹1.51–1.55 crore).
👉 The path differs, not the destination.

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7. Tax Difference Is the Real Game-Changer

If your taxable income is below ₹12 lakh:

• IDCW dividends may fall into 0% tax bracket

• IDCW becomes more tax-efficient

If your taxable income is higher (15–30% slab):

• IDCW dividends get taxed heavily

• SWP becomes much more tax-efficient

Simple Rule to Decide

• If effective tax is <12% → Choose IDCW

• If effective tax is >12% → Choose SWP

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8. Common Myths and Truths

Myth 1: IDCW is free income.

❌ False — it is your own profit being distributed.

Myth 2: SWP will destroy my capital fast.

❌ Wrong — as long as withdrawal rate < fund return, your value grows.

Myth 3: IDCW NAV keeps falling, so returns are poor.

❌ No — because NAV drop = dividend received. Total value remains similar.

Myth 4: SWP is complicated.

✔ It is actually simpler and more customisable.

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9. Which One Should You Choose?

Choose SWP if:

• You are in a higher tax bracket

• You want control over payouts

• You want inflation-adjusted income

• You prefer flexibility

Choose IDCW if:

• Your income is low (so tax is 0)

• You want fixed passive income

• You are investing in hybrid/multi-asset funds

• You don’t want to worry about selling units

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Conclusion

Both SWP and IDCW can create reliable monthly income.
But they are meant for different tax situations and different personalities.

• SWP = Flexibility, control, tax efficiency for higher-income investors

• IDCW = Simplicity, steady payouts, best for lower-income slabs

When used wisely, either option can deliver excellent results—as the real-world numbers clearly showed.