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Simple Question - Income vs Accumulation

Investment discussion for beginners. Why you should invest your money, get help getting started
zharrt
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Simple Question - Income vs Accumulation

#470145

Postby zharrt » January 4th, 2022, 11:56 am

Forgive my ignorance but can someone answer a simple question to check my understanding as I have mainly been holding individual shares rather than funds. I am looking to switch my focus from income to growth but am confused that some growth funds pay dividends too.

Most funds have both Income or Accumulation, if the fund declares a dividend (as I assume most do) the main difference is for an accumulation its automatically reinvested so the number of units stay the same, but the value increased. Where as income you are paid in "cash" which can then be used to automatically reinvest to get more units but at a lower value.

The total value should remain pretty consistent, however accumulation will give a higher total return as there might be fees involved in taking an income and then reinvesting in the same fund by buying more units

(I ask this question as generally I let any income reinvest using HL's auto reinvest feature, however I like the option of moving income from one place into another if I am over exposed)

doug2500
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Re: Simple Question - Income vs Accumulation

#470168

Postby doug2500 » January 4th, 2022, 1:37 pm

You're more or less right although I've held acc funds that do it by issuing more units rather than increasing unit value.

Note that either way most acc funds still declare a dividend which has to go on your tax return and into your records. For this reason many sensible people stay away from acc funds, and reinvesting inc dividends, in any taxable accounts. You can quickly tie yourself in knots with capital gains, equalisation and group 2 shares.

zharrt
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Re: Simple Question - Income vs Accumulation

#470184

Postby zharrt » January 4th, 2022, 2:09 pm

doug2500 wrote:You're more or less right although I've held acc funds that do it by issuing more units rather than increasing unit value.

Note that either way most acc funds still declare a dividend which has to go on your tax return and into your records. For this reason many sensible people stay away from acc funds, and reinvesting inc dividends, in any taxable accounts. You can quickly tie yourself in knots with capital gains, equalisation and group 2 shares.


Thanks, everything is within a SIPP so hopefully I don't have to worry about tax returns and capital gains

Urbandreamer
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Re: Simple Question - Income vs Accumulation

#470197

Postby Urbandreamer » January 4th, 2022, 2:52 pm

Just a quick point, related to your other threads.

Income and Accumulation units are associated with open ended investments (Unit trusts etc).
There is no cap on the fees that HL charge for holding open ended investments investments, unlike Investment trusts or ETF's where there is a cap on the fees.

mc2fool
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Re: Simple Question - Income vs Accumulation

#470202

Postby mc2fool » January 4th, 2022, 3:08 pm

Urbandreamer wrote:Income and Accumulation units are associated with open ended investments (Unit trusts etc).

Traditionally, but not always. E.g.

CUKX, iShares Core FTSE 100 UCITS ETF GBP (Acc) https://www.ishares.com/uk/individual/en/products/253716/

amongst many other iShares Acc ETFs and State Street (SPDR) Acc ETFs and undoubtedly others too. ;)

tjh290633
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Re: Simple Question - Income vs Accumulation

#470227

Postby tjh290633 » January 4th, 2022, 4:25 pm

zharrt wrote:Forgive my ignorance but can someone answer a simple question to check my understanding as I have mainly been holding individual shares rather than funds. I am looking to switch my focus from income to growth but am confused that some growth funds pay dividends too.

Most funds have both Income or Accumulation, if the fund declares a dividend (as I assume most do) the main difference is for an accumulation its automatically reinvested so the number of units stay the same, but the value increased. Where as income you are paid in "cash" which can then be used to automatically reinvest to get more units but at a lower value.

The total value should remain pretty consistent, however accumulation will give a higher total return as there might be fees involved in taking an income and then reinvesting in the same fund by buying more units

(I ask this question as generally I let any income reinvest using HL's auto reinvest feature, however I like the option of moving income from one place into another if I am over exposed)

Do not be confused between Growth and income. At this stage what you want is Total Return at the best level you can. This can come from reinvestment of dividends as well as capital growth. Sometimes shares with a higher yield give a better Total Return than do shares with lower yields, aiming for capital growth. If you want proof of this compare the records of the FTSE350HY (HIX) and FTSE350LY (LIX) indices. You will see that for a long time the HIX outpaced the LIX, both as normal and TR versions. In the last few years it has been the other way round, but, as you see, aiming for capital growth is no guarantee of a higher Total Return.

Regarding funds, accumulation units will save the costs of reinvestment of dividends, but otherwise they should be little different from income units with dividends reinvested. There is an inevitable time lag between accumulation (at XD date) and the reinvestment (after payment date). You may find that reinvestment in the source of the dividends may not be the optimum approach. Comments are made above about the effects of ongoing charges on the performance of funds. If you choose to invest in shares instead, there are no ongoing charges, just the platform costs, which can be minimal, and the cost of dividend reinvestment. You are at an early stage, so the value of your portfolio will still be growing, but with a platform fee of £40, for example, if the value is £40,000 the fee will be a percentage of 0.1%, at £400,000 it will be 0.01%, and so on. Think about it.

TJH


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