Accumulation vs Income Funds

When you come to invest, you may find that the funds are generally placed into two categories: accumulation funds and distribution funds and it's important to understand the difference between these before picking what you want to invest in!

So what I will start by saying is that distribution funds are often referred to as income funds. Don't worry about this just think of them as interchangeable. And when a fund is referred to as a growth fund this just means it's an accumulation fund. Just bare that in mind but i will try to refer to them as accumulation and distribution funds. Okay now we know that, let's get going.

If you see that a fund is an accumulation type of fund, then this means any money it makes (any profits) will automatically be reinvested into that fund. This means that the money generated will then work to raise the value of your investment.

If you see that a fund is classified as a distribution fund then the profits will be paid directly to you as the investor and are called 'dividends payments'. So it's like you're getting an income from these investments providing the investment is making money. Then with the money an income fund produces, you can decide whether you reinvest that money into the fund again, a different fund or you can even decide to use the money to buy some new shoes. These dividends payments may be paid out to you at regular intervals but how often they are paid to an investor depends on the particular fund and could be monthly, quarterly or annually.

So just to recap an accumulation fund aims to increase the value invested over time whereas a distribution type of fund aims for a steady income. As with everything, it's not always this clear cut and quite often funds will try to give both options.

So which is better?

You cannot really answer this question easily as the best type of fund really really depends on your needs and wants for your investments. Both have their own benefits.

If your goal is long term growth and you're investing for the long term and you don't want an income from it but instead plan to just leave it there to compound then an accumulation fund is better for you. If however you want to draw an income, maybe people looking to use their investment to fund retirement or life in general, then a distribution fund may be better.

Those who pick the accumulation share class will benefit from the effect of compounding - which means in effect that they get returns on their returns. The effect becomes even more powerful when dividends are also re-invested and allowed to compound. Over the long term, dividend reinvestment is where the vast majority of the stock market’s returns come from. If you invest in an accumulation fund, you won't really see money coming from that investment as such, this is because any money it generates is re-invested automatically in the fund. However, what you will see as the investor is share price increasing.

On the other hand, some investors may prefer to manually re-invest the income generated, perhaps into another fund which is an option you get with distribution funds but not with accumulation funds. However, there is a risk that less engaged investors who take this path will forget to do anything and unknowingly build up their cash balances - when I didn't understand the difference between these funds I was definitely doing this!

How do I tell whether a fund is an accumulation or income fund?

Quite often once you're aware of what the two different types of funds are it's quite easy to tell which one a fund is as the name of the fund will give it away. For example, there's a fund on Vanguard called 'FTSE 100 Index Unit Trust - Accumulation'. Sometimes the abbreviation 'acc' and 'dis' are used so watch out for them. On Vanguard, if the name of the fund doesn't tell you whether it's an accumulation or income fund, the 'Key Investor Information Document' should (see below) :

Some other platforms allow you to filter funds by share class type too which makes it even easier!

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Thank you for reading,

Hayley