Most funds offer investors the choice of two types of shares (for ICVCs and OEICS) or units (for unit trusts): income or accumulation. Knowing the difference will help towards your initial decision-making and, ultimately, should help in achieving your investment goals.
What is the difference between income and accumulation?
Firstly, income and accumulation are not synonymous with the income and growth investment styles that fund managers may follow. An income fund will typically invest in yielding securities with the objective of generating a high or steady level of income, whereas a growth fund will invest in the securities that the fund manager believes offer the best prospects for capital growth over time. However, both income and growth-style funds are likely to offer their investors the options of income or accumulation shares.
The investor’s choice of income or accumulation ultimately comes down to their investment objectives and constraints, particularly the balance of their needs for capital growth or a cash income.
Many asset classes offer the prospect of an income stream alongside potential capital growth, whether dividends on equities, coupons on bonds or interest on cash balances. At the fund level, this income stream can either be paid out to investors or reinvested back into the fund. This choice underpins the fund unitholder’s option to invest in income or accumulation units.
An investor selecting income units or shares will receive regular payments from the fund, comprising the dividend and interest income from the securities held in the fund. Accumulation units by contrast will reinvest income back into the fund.
Is income or accumulation the best choice for me?
The best share class for you will depend on your individual circumstances. It is worth seeking independent financial advice if you are uncertain about what share class you would most benefit from at this time.
An investor needing to fund regular outgoings may benefit from the cash payments offered by income units. Individuals looking to maximise their capital growth are likely to opt for accumulation.
Choosing to accumulate or reinvest your stream of income back into the fund also offers the potential to benefit from the power of compounding; if the fund successfully generates a good positive return, then total returns to the investor will be significantly enhanced if they reinvest income rather than elect to receive it as distributions which are spent or held in a low low-return asset class such as cash.
Not sure whether you need income or accumulation?
If you are unsure whether you may need income distributions from your fund investment, it is worth bearing in mind that you can always generate payouts from your fund by selling a portion of your holding.
While accumulation units automatically reinvest the income from the underlying securities held, investors are still free to buy or sell units as they please. So you could invest in accumulation units and sell units as and when required. This could be implemented by a regular divestment schedule – effectively replicating the income stream from owning income units – or a more tailored approach that creates a flexible income stream to suit your needs.
Invest today
Liontrust offers a large range of equity funds, providing a variety of solutions to meet investors’ objectives. These cover a range of investment styles, including income, growth and value, while most funds also offer the option of owning income or accumulation shares.
The funds are managed by different investment teams using their own distinct investment processes, but they are all actively managed funds based on high conviction approaches.
