An accumulation fund has a very simple job and that is to automatically reinvest dividends for you.
Instead of paying out your dividends (or interest) as cash, your income is put to work buying more of the fund’s underlying assets.
The counterpart to an accumulation fund is an income fund. An income fund sends dividends to your broker account for you to spend, save, or reinvest as you wish.
Income funds give you freedom to choose how to use your dividends. In contrast accumulation funds directly harness the power of compound interest to build your wealth.
Because they do that automatically, they make life simpler when growth is your priority.
What is an accumulation fund?
An accumulation fund is a variant of an open-ended investment fund. Standard open-ended investment fund types include Open-Ended Investment Companies (OEICs), Unit Trusts, and Exchange-Traded Funds (ETFs).
An open-ended fund such as a global index tracker may be made available in different versions that are known as share classes.
A single fund may come as an accumulation share class or as an income share class. Think of them as two flavours of the same thing – or perhaps the accumulation class as like the convertible version of your favourite car.
Both share classes represent your ownership of the same portfolio of underlying assets. But the classes confer different rights upon you.
In the case of the accumulation class of a fund, your dividends will be retained and reinvested for you in that fund.
An accumulating fund (or ETF) is just another name for an accumulation fund. The same goes for the terms acc fund or capitalising ETF.
They all do exactly the same job. That is to reinvest your dividends back into the fund.
How do accumulation funds work?
Accumulation funds work by purchasing more shares in the companies they hold with the dividends earned from the underlying investment portfolio.
This grows the value of your fund’s acc units (or shares), like a stalagmite reaching for the ceiling of a cave.
Bond accumulation funds work the same way. As your interest payments roll in they buy more of the fund’s underlying portfolio of bonds.
Your dividends do not buy you more units1 in an accumulation fund. That’s different to what you’d expect if you manually reinvested your income.
Instead, the reinvested dividends increase the worth of the underlying portfolio. This pumps up the price of every accumulation unit you own.
The effect on the value of your holdings is exactly the same as if you bought more shares with your dividends, however.
Our piece on income vs accumulation funds includes a chart that proves the point. The compounding happens — but in the price of the unit.
The upshot is that you’ll pay more for each unit of an accumulating fund than for one of its income fund counterpart.
But that doesn’t make the inc fund a more attractive bargain than the acc version.
Unit economics
Imagine the Monevator FTSE Human Folly Index Acc fund where:
- The accumulation units are priced at £2
- The income units are priced at £1
For every £2 that you have to invest, you can spend £2 to bag two £1 income units, or alternatively your £2 could buy you one accumulation unit.
Let’s now suppose the fund goes up 10%.
- The accumulation units are now worth £2.20
- The income units are now worth £1.10
Your cash return would be identical at 20p, whether you’d bought two income units or just one accumulation unit.
The only performance difference is that accumulation units will without doubt be compounding your dividends.
In the long-term, the value of a compounding accumulation fund will leave its non-compounding income twin in the dust.
But remember, the income unit owners are getting all those dividends to spend straightaway when they’re paid out. There’s no free lunch for anybody here!
When do accumulation funds reinvest dividends?
Accruing dividends are reflected in the price of an accumulation fund as they trickle in from the underlying investments.
Fund managers will reinvest at the most opportune moment while balancing investor cash inflows, outflows, and transaction costs.
However, accumulation funds still have an ex-dividend date. This determines whether you’re entitled to receive the dividends collected up to that point.
The day before the ex-dividend date:
- Fund units bought on this day are eligible for the declared dividend.
- Units sold on this date are not eligible.
The ex-dividend date:
- Previously held fund units sold on this day are still entitled to the declared dividend.
- Units bought on this day are not.
This all matters if you hold accumulation funds outside of your ISA or SIPP. That’s because tax is due on dividends, interest, and capital gains earned from acc funds, just as it is on income funds.
But calculating the tax you owe differs slightly as you must subtract your dividends from an accumulation fund’s capital gain. That way you’ll avoid being taxed twice on the same amount.
Our post on UK tax on reinvested dividends walks you through the calculation.
Thankfully you should receive a tax voucher from your broker detailing dividends earned on each of your accumulation funds, if you own them in taxable accounts.
Keep that paperwork safe. It’s paracetamol for self-assessment pain. And complain if you’re not receiving the voucher.
(Your first one may only arrive after the end of the first tax year that you’ve owned your accumulating fund.)
Dividend details
Your dividend entitlement doesn’t make any difference to the amount you buy or sell an accumulation fund for.
Accrued dividends are always baked into the price.
If you’re ineligible for the dividend when you bought – that’s okay. You haven’t inadvertently gamed the system. Your dodgy dividends are cancelled out because you effectively paid for them in the higher buy price.
And you don’t lose out on dividends rightfully earned when you sell. That’s because they’ve already swollen the sale price you receive.
Rest assured the system smooths out the complications, even though it’s not exactly intuitive.
Do accumulation funds pay dividends?
Yes, accumulation funds pay dividends. But they reinvest them straight back into your investment to boost its performance.
The dividends aren’t deposited into your broker account as cash as they are with income funds. (The way to realise acc fund dividends would be to sell units of your fund up to the value of the dividend.)
But how can you enjoy the thrill of watching your dividends payout like a fruit machine win when you can’t see them rack up in your account?
Well, you can track how much tax-sheltered accumulation funds have been fattened by dividends using the technique below…
How to find dividend distributions for accumulating funds
To find the dividend distributions of your accumulation fund:
- Go to Trustnet and search for your fund using the drop down menus on the home page.
- Most index funds will be in the Unit Trusts & OEICs section of the Fund Universe menu.
- There’s an ETF section in the same menu.
- Obscure foreign-domiciled funds and pension funds can be found in the Offshore Funds and Pension Funds drop-downs respectively.
- Click on the dividend tab from the fund overview.
- Make sure you click on the right fund. Trustnet tends to bundle lots of similarly named fund variants in the same place. This piece on comparing funds explains how to distinguish them.
- Multiply the dividend amount by the number of units you held the day before the ex-dividend date. That tells you how much you’ve earned in pounds and pence.
- Enjoy closet kicks from seeing the money flowing from Global Capitalism plc to You plc.
- Possibly plot the gains on some kind of spreadsheet. (How much do you want to stretch out the joy?)
Trustnet doesn’t always come up trumps. Here’s an alternative method:
- Go to Investegate’s advanced search page.
- Put your fund manager’s name (e.g. iShares) in the Company Name field.
- Set the All Categories field to Dividends.
- Change the Time Span field to something more generous like six months.
- Click the Search box if nothing happens automatically.
- A list of dividend payment announcements should come up.
- Click on the Dividend Payments link in the right-hand column.
- The dividend announcement should pop up. Read it and you’ll hopefully find your fund and its dividend result somewhere within.
Alternatively you can check your fund’s annual report, or email the fund provider.
Happy hunting!
Take it steady,
The Accumulator
- The same rules apply if your fund holdings are described as ‘shares’ not units. I’ll just use the term unit from now on to save time. [↩]
Keeping a small amount aside to ‘gamble’ with as a distraction really works for me. Thanks for that tip. No doubt without it I would be taking my passive portfolio apart to see how it works every few months. Now, how are those dividends doing …
Can this be applied to accumulating ETFs?
For example db X-trackers FTSE ALL-WORLD EX UK ETF (XWXU)?
Thanks.
I tend to have 5% of each pot set aside for what I euphemistically call “themes”.
Monevator is responsible for at least some of these “themes”, but only those that have performed well, of course!
@Gadgetmind – “Responsible”… I suspect you have your tongue in your cheek, and I’m very glad you’ve find the site useful, but I best take the opportunity to remind everyone that we are *not* responsible for anyone’s investments. All actions at your own risk. Here’s the disclaimer.
Sorry if that sounds a bit heavy, but I do need readers to understand. Cheers! 🙂
Yes, tongue firmly in cheek!
(And even that LLPC is looking like it will come good in May. 🙂
A couple of years ago i got fed up with the abysmal %rates paid by some institutions and the way the con the savers, give you 1-1.5% and lend it out at 6-8% . plus when NSI scrapped the Index linked Bonds. I decided to have a punt myself on the FTSE.
I tried using one of those dummy accounts, then after 4 month i started to use real money as ISA’s matured building up slowly to the value of a modest new car
I still keep ISA’s, and Premium Bonds for safety, but used the above sum as a sort of hobby fund. My aims were simple, try to beat, the ISA rate, the RPI +1% and even those pinstriped suits who market trackers.
After 18 months i have achieved all 3 aims, plus have found myself an interesting hobby along the way.
Great post although having just looked through the index funds I’ve invested in I see that they pay dividends just once per year (mainly HSBC Index funds) so this hasn’t kept me distracted for long.
City of London Investment Trust pays 4 times a year so that one is slightly more exciting!
Really useful article (and something I’ve often wondered about).
Always nice to read about someone other than myself who can get joy from a spreadsheet!
@ J Cox – Trustnet have a separate tab for ETFs but there’s no divi info for XWXU sadly.
@ Gadgetmind – I’ve often thought of doing the same thing. A small sum in a timber ETF, another in farmland, and so on. Resisted the urge so far.
@ JC – You’ll always look forward to July though.
@ Jonny – Good to know I’m not alone!
I use Trustnet to track all my investments, but own shares through the Motley Fool sharebuilder platform. When I look on the Motley Fool valuation page it shows the value of my investments ignoring dividends. Buy updating trustnet with the quantity of shares I own (which rises with each dividend) I can compare the total value of my investments with and without dividends.
For example my Vodafone shares I bought a couple of years ago are up £52 on Motley Fool and £97 on Trustnet, so my dividends have contributed £45, happy days.
I am new to this, so excuse what may seem a simple question regarding ex dividend. I was about to buy some HSBC American Index Acc units today and discovered they are now “ex-dividend” as of today (16 May 2012). I intend to invest for the long term, so my understanding is that the growth comes from the reinvestment of the dividend other than the unit price,right? Therefore, is there any point in buying these now or should I wait to wait until later. Am I missing something …?
@Donny – buying cum or ex dividend makes no difference to long term total return. If you go for income units outside an ISA/pension wrapper, it does let you decide whether to have dividend income or capital gain, but there is no difference for accumulation units. The dividend is paid out and then buys more equities within the fund, so the price remains the same.
@ Donny – I wouldn’t delay. The ex dividend mechanism stops Jonny-come-lately’s scooping up a share of dividends they haven’t properly earned. The price will have dropped slightly when the fund went ex-divi, so you’re not losing out. If you’re in for the long term you’ll get plenty of dividends in the future and may benefit from market uplift in the meantime.
Haven’t properly earned? Equities trade “dirty” some when you buy “cum dividend” you pay out in capital for the dividend that you’re about to receive. Other than turning capital into dividend income (or vice versa) it’s all neutral.
Nice artitcle thanks, exactly what i was looking for.
I’m new to personal investing and to this site – of which i’ve benefited a great deal from today by reading, and reading and reading and then i read some more. Now my head hurts so this is my last read, maybe….
I recently invested in a fund (FUNDSMITH), i’ve only made one large contribution. The fund is wrapped up in an ISA with TD direct. The basis of passive investment for me is the compounding….
How does compounding work if you are taking the money out of the fund and in your pocket. Perhaps i’m being naive but i’m struggling to compute how this method of interest on interest works if you are taking back what will work towards the compound effect?
thanks
@Emanon — The return you get from a fund has two components — the capital return (how much it goes up in value) and the income (which is what it pays out to you, which you’re calling ‘interest’ here but is not quite the same).
Let’s take a step back and consider an individual (and made-up!) company. In a year it makes say £1million profit. It might decide to pay out £500,000 as a dividend to its owners (the shareholders) and reinvest the other £500,000 in a new area of business.
Over time, the new investments it makes in its business should generate a higher profit than £1million. So the business becomes more valuable, and eventually its share price will go up. If you own its shares, you’ll benefit from this rising share price, as well as the share of profits you’re paid every year.
An equity fund like Fundsmith holds a bunch of such companies. So over time, if it gets its picks right you’ll benefit from the rising value of those companies, plus the income they pay out, minus any fees.
The compounding of company values happens automatically — it’s exactly the same as house prices going up! 🙂
To get the benefit of compounding the income, you have to not withdraw the money but rather reinvest it back into the fund. It can’t grow in your pocket — you’re quite right on that!
Investing is at its most lucrative when you reinvest the dividend/fund income back into companies that are also seeing their value rise. A double whammy. 🙂
So as i understand it; I invest into the fund, the fund then invests into it’s individual stock selection (in this case a equities only fund). They are paid from their successful stock picks (yay), they then re-invest the dividends paid to them from their investments either into the same stock or another choice. The overal capital gain from their investments are fed back to the people who participate in the fund, they in turn either take the dividend or re-invest into the fund to capitalise on the compound effect….so far so good?
But, assuming the fund share goes up in value, am i then starting to price myself out of the fund off the back of fueling its success. i.e whereas now i get more for my buck, for that same buck in the future that same buck could get me less. Correct?
Aside from this can you please help clarify the logistics of the internal working of a fund;
– how often is the compound interest calculated within the fund.
(my fund is up since i started investing but i won’t have received any of that interest?)
– how does one withdraw from the fund when that time comes (or if you want to get out of the fund early, perhaps some clues as to early exit signals)?
(is it simply a case of selling off your shares? Is their a smart exit strategy to maintain the compound interest growth, or at least try to buffer it by taking out a certain percentage below the funds growth?)
sorry if these questions are quite granular, for me personally i think it’s vital to know the finite functionality of these funds as it’s hard enough searching through the 100’s of different funds out there.
thanks
@ Eamon – Rebalancing is your best bet to take advantage of soaring assets. That will transfer gains to cheaper asset classes that are likely to outperform in the future.
Unfortunately there was no information on any of the funds I hold. I tend to check them daily, but still have no idea when my accumulation fund dividends are reinvested.
There is no increase in the number of units, so I guess the dividend is lowering or increasing the average cost per unit dependent upon the time of the dividend reinvestment. I can’t see any changes here either over time.
Though I appreciate the notion of passive, and that any information on dividend reinvestment could perhaps increase the cost of funds, I do wish there was a bit more transparency on this.
Hi Lee,
I totally agree with you about the transparency. Try searching on Investegate or Citywire or write to the fund manager’s directly for the info.
Post now updated with the Investegate method.
“Multiply the dividend amount by the number of units / shares you held in the fund on the payment date to discover how much you’ve earned in pounds and pence. (Don’t include any units you bought during the ex dividend period.)”
If you sold units during the ex dividend period, then you should add those units on to the number of units held on the payment date before multiplying
A simpler way of describing it may be to say just multiply the no. of units held on the ex dividend date (not the payment date) by the dividend amount to work out the dividends you’ve been paid. The actual payment date is only of use to know in which tax years tax return you have to declare the income.
Or have I missed something?
Hi Rhino,
It’s been so long since I wrote this, I can’t find my original research. Have you come across something that says acc funds work this way or are you making a deduction? Would be good to know your line of reasoning.
All I’m saying is that for any acc type fund, multiplying the no. of units held on the *payment date* by the dividend amount, but not including any units bought in the ex-dividend period is the same as saying multiply the no. of units held on the *ex-dividend date* by the dividend amount.
I am assuming the inverse issue, i.e. you sell some units during the ex-dividend period, means you still receive dividends on the *payment date* equal to the units held on the *ex-dividend date* held multiplied by the dividend amount. That is only an assumption, but it would seem unfair if it weren’t the case as its just the mirror of the case where you buy during the ex-dividend period.
Finally, I have noticed that the ex-dividend date and the payment date can span tax years, hence my comment that the no. of units held on the ex-dividend date is what is used to compute the dividend paid, but when deciding which tax return you declare that dividend in, you have to use the payment date
I hope that makes sense, although writing it, I think I may still have struggled to make my points any clearer.
the old ad campaign slogan – ‘tax doesn’t have to be taxing’ was never coined by a creative that ever had to file a return, I know that much for sure.
I feel it can get easier with practice, but you have to suffer a good few times first beforehand
Yes, I think I erred on the side of you wouldn’t get the payment if you sold units during ex-divi period. Value would have dropped after ex-divi date, you sell, fund price bumps up slightly on payment date, but no-ones keeping a record of when you sold your units, so you lose out.
Well its a funny old world..
Come to think of it, I think i did sell a bunch of stuff in the ex-dividend period this year
curse you god for making it this way..
I wonder if it cost me much?
This thread is pertinent:
http://moneyforums.citywire.co.uk/yaf_postst2507_Fund-Income-and-Accumulation-Units.aspx
TL;DR – It prob doesn’t matter when you sell a unit trust – you won’t lose out.
What this has reminded me of though is making sure you factor in divis when trying to calculate CTG, so you don’t end up paying income tax *and* CGT potentially.
Holding acc units outside of a tax-free wrapper really is an utter nightmare
Thanks for following this up Rhino. I think I’ll mail some fund providers and see if they can shed more light on it. Should only take a couple of months to get a reply.
If it works as Alan thinks it does it would be impossible to know how much dividend you’ve accumulated. And acc funds still have ex divi and payment dates. I suspect we haven’t quite got to the bottom of this yet, but let’s try!
I had a similar feeling, i.e remaining a little unconvinced
Last night I did find a report from HL (who I was with at the time) that included a tax certificate for 2014-15. Thankfully this had all the dividend details in it, so I’ll use that now for the old return.
I’m hoping IWEB will provide similar data for next year.
One thing I noticed was that computing the dividend paid as per this article resulted in a no. roughly double what HL reported. So if I had used that value I would be on the hook for approx twice as much tax – which is a bad thing.
In that particular year, I didn’t sell anything in the ex divi period (I did that in 2015-16) so it can’t be due to that. I did only buy the units in Oct 2013 though, i.e. roughly half way through the tax year, so maybe it makes sense I only received about half what your article calculation produced? The fund in question went ex divi on the 01/04 with a payment date of 31/05 – so spans the tax year.
I think in future, unless I can bottom this out, I might judiciously wait until the start of june before selling anything again. Just to be on the safe side.
Interesting. I’ve just got a dividend payment notice from YouInvest for BlackRock Glb Property Tracker D – Acc.
The payment tallied exactly with the methodology described in the article and using the dividend figure reported by Trustnet.
This payment had a bit of everything: units held before the distribution period, units bought during the distribution period (covered by an equalisation amount that accounts for a purchase price that contained income) and units bought during the ex-divi period that paid out nothing.
Here’s some notes I’ve collected on equalisation:
Any units purchased prior to the reporting period, are classified as group 1 units. These units do not have any equalisation element.
If you have purchased units during the reporting period, these would be classified as group 2 units. As the purchase price during the reporting period would contain an element of income, a capital distribution payment (Equalisation) is made to clients to effectively refund for the income element in the original purchase price.
(iii) Equalisation is accrued income included in the price of units/shares (Group 2 units/shares) purchased during the period. It should be deducted from the cost of units/shares for capital gains tax purposes and is not subject to income tax. (iv) Group 2 units/shares are the units/shares purchased during the distribution period and which were held at close of business on the period end date. They may constitute all or part of your total holding. Group 1 units/shares are those purchased prior to the distribution period. (v) A unitholder/shareholder within the charge to UK corporation tax receives the dividend distribution excluding any equalisation as unfranked income to the extent that the gross income less tax from which the dividend distribution is made is not franked investment income. The unfranked part of the distribution is received as an annual payment from which income tax at the lower rate has been deducted. The maximum amount of income tax which may be reclaimed from HM Revenue & Customs is the corporate unitholder’s/shareholder’s portion of the fund’s net liability to corporation tax in respect of the gross income.
wow! worth repeating at this point that ‘tax doesn’t have to be taxing’ i feel. well possibly in some parallel universe.
good investigative work TA
I tend to take the lazy mans approach to this issue myself. All funds in ISA’s and pensions are accumulation as I don’t have to keep a record of dividends, and all funds outside these wrappers are income. This makes life a good deal less painful when doing the yearly needful 🙂
@cowboy – that is sensible, however my brokers (iweb and hl) both do the work for me when they produce my tax certificates each year. I just have to cut and paste into the HMRC website. I do have to take it on trust that they are right. I have never yet been able to compute the same no.s that they do (TA is a miracle worker to have achieved this feat) – but thankfully theres are always smaller so who am i to argue.
My S&S ISA and SIPP are with AJ Bell which provide a transaction history for each account. Any Accumulation Distribution (Dividends) my one accumulating fund “pays out” is listed there and has its own reference which is hyperlinked to a document with all the details (number of shares, dividend amount (AJB calls it Group 1 payrate and Group 2 payrate), ex-dividend date and payment date etc.). The document could be printed out if required. I guess that AJB also does Tax Statements howecer I do not require one of these at the moment.
I also have bookmarked a link to the Income history page of the fund I am holding and work out the “dividend” myself in advance just to be sure. The amounts have all been correct from AJB but they have been slacking in crediting a dividend of this fund on time this year.
Regards, Pinch
With charles stanley direct go to ‘my dashboard’ then ‘stock movements’
… Easy !
One thing I do is compare the Inc and Acc versions of the fund on the same chart at Google Finance. Charles Stanley seems to include dividends on the charts even for the Inc versions, but with G Finance you can really see the difference the divs make.
Great article Accumulator and interesting comments too.
I have several ‘acc’ funds and want to gradually release some cash from them over the next few years.
I wonder if anyone has any thoughts about whether it is best to do this by selling units in these funds, or by selling and re-purchasing them in their ‘distribution’ versions and taking their natural yield..?
Good stuff. While I’ve enjoyed the hassle-free reinvestment which comes with buying ACC units for a few decades now, over the last year or so I’ve found myself selling off the big holdings with any significant yield and reinvesting them in their INC equivalents. (Unfortunately my platform isn’t one of the few I’ve heard rumoured will do straight unit-type switches; but in the end I got lucky on the out-of-the-market timing. This is all SIPP&ISA stuff so no CGT events to worry about). Reason is, I want to use the dividend income stream to help rebalance the portfolio towards other assets rather than keep reinvesting in more of the same.
@Maximus: I figured a one off dealing cost (well, two, one to sell, one to re-buy) per holding was better than sticking with the ACC units and paying for yet another sale every time I wanted to convert some of the internally accumulated dividends’ value to cash. (But any exposure to CGT might have changed my approach.) Note that this isn’t a fast way of “releasing some cash”: if asset prices go nowhere and with no other injection of funds, a 100% equity portfolio yielding 4% (optimistic?!) and accumulating that as cash (or 0% bonds) would still be 83% equities after 5 years and 71% after 10 years.
@Tim: Thanks for your thoughts. ‘Acc’ vs ‘Inc’ units seems a finely balanced contest for getting an ‘income’ in practice.
In my case I’d only be liberating cash every few months and dealing costs would be free; there are no CGT issues. Plus I could choose when to take the cash and allow dividends to be naturally reinvested within the funds until then…
TA, I will start to live off my dividends this month. 46 dividend machines generating income. Brokerage accounts have been re-programmed to transfer dividends directly to my checking account. Cant wait for first dividend to land in my checking account, will be amazing feeling after accumulating all these years. US broker has given me an ATM debit card and I have used that multiple times already to withdraw “real” cash.
Regards, Jon
Jon
Thanks for the article. I just checked my main holding – Vanguard Lifestrategy 80 Acc and it shows a dividend yield of 1.65% which is lower than i expected. Also they only seem to be paid annually which i assume would disadvantage compounding from more frequent re-investment. Growth has been good though, so can’t complain.
@Maximus: “I wonder if anyone has any thoughts about whether it is best to do this by selling units in these funds, or by selling and re-purchasing them in their ‘distribution’ versions and taking their natural yield..?”
Or you could just look up the ‘natural yield’ of the Inc version and then sell whatever amount of the Acc version that’ll provide the equivalent payment into your account.
@ Maximus – psychologically a lot of people seem to find it easier to take income than to sell acc units. Particularly in a down market. Tyro’s idea is great though and seems to offer the best of both.
@ Jon – Great to hear. Can just imagine the smile on your face. Love your description of the dividend machines and am looking forward to the day I join you.
@Tyro & @The Accumulator: Thanks for your help guys. I think I’ll run with selling ‘acc’ units. I’ve set up a 2 year cash buffer fund so ‘down markets’ shouldn’t be a problem.
Hi Investor, Accumulator,
I’m hoping you could help me with a query I’ve got regarding accumulation units – since September 2016 I’ve been drip feeding a small amount of cash into an index linked fund with accumulation units on a monthly basis and I’ve recently noticed that the number of units I currently hold exactly matched the number of units I’ve directly purchased. I was under the impression that accumulation funds would reinvest the dividends paid out by the fund into purchasing more units, which would compound the return over time as more units = more dividends = more units and so on. How does compounding work if the dividend merely pumps up the value of each unit I hold rather than increasing the number of units held?
I assume I’m missing something so any sage guidance would be appreciated!
@Snuff — Hi! Accumulation (Acc) units do reinvest the dividends. This is reflected in a rising unit price though, not in owning more units. If you look at a fund that has otherwise identical Acc and Income (Inc) share classes, you’ll see this reflected in their unit prices. The Acc unit price will be higher.
The compounding happens — it happens in the price of the unit. 🙂
See this article:
http://monevator.com/income-units-versus-accumulation-units-difference/
@Investor, thanks for the reply. I think I’ve got the gist of it now, although the more I think about it the more I confuse myself so I’ll just take your word for it and keep on trucking 🙂
I exclusively use accumulation funds in my children’s JISA. The JISA just has one ETF with monthly investments. I’ve thought about switching to an income fund so the kids can learn about dividends and compound growth (nothing like a real example). Does anyone know if the banks automatically invest the dividends from income funds or is there a minimum threashold for automatic investment? For example, if the dividend is £3.20 will it be used to purchase £3.20 worth of the income fund, or do I need to build up to £100?
@ Asdf – many brokers do have a minimum investment amount and they’ll probably charge you for buying new shares in the ETF too. They won’t automatically reinvest the dividends for you.
If you plot a performance graph with two lines – the inc and acc versions of the same index fund… then the difference in value between the two lines on the graph is entirely the dividends (and their compounding over time)..
Is that correct?
Hi Jon, that’s correct.
This is exactly what I wanted to know about funds with acc. wondered why my units had not increased, like they do with normal shares when reinvested.
This explained it all and a lot more.
Thank you for your explanation which was simple to understand
Shay
Accumulation funds for shares makes sense to me but I’m asking myself if holding bonds in accumulator fund is sensible (where yield has gone up so much). If I take interest/dividends then I can reinvest (albeit with charges for doing so) and have more shares, which can rise up and down with the tides of the market. However, if I let the fund acquire more bonds with me holding the same number of shares and then the Central Banks alter things, the fund can have the dividend growth value wiped off in one go and I’ve no more shares than I began with…and have to wait for the spring tides again. Maybe that’s just trading, but I’d appreciate thoughts on bond funds. My goal is to diversify rather than have income just now, which is why I didn’t go for distributing versions.
Hi Penny,
While it’s true that bonds are susceptible to government intervention so are shares. Consider, for example, rising interest rates causing a global recession. Or anti-trust regulation permanently impairing the future profitability of Big Tech. Or the fact that the equity risk premium is tethered to the ‘risk free’ asset i.e. treasury bills.
Higher yields now make bonds more profitable than less – it’s just most of us have suffered a hideous bond crash in the meantime, so I’m not surprised you’re not enamoured with them.
The rise in yields has also improved the diversification potential of bonds – there’s now more room for capital gains if interest rates fall again. However, conventional bonds suffer during inflationary periods – an issue which we haven’t had to worry about for over 40 years.
Ultimately, choosing to redirect bond interest to shares is the same as an asset allocation change. You’re deciding to reweight your cashflow into equities. You can achieve the same ends by changing the equity:bond ratio of your monthly contribution or by selling some of your bond allocation and buying more units in an equity fund.
I hope that helps a bit.