What’s the difference between income and accumulation funds?
So you've picked an investment fund. Now there’s another tricky decision. Should you buy the income or accumulation version of the fund?
- Income: any gains made by the fund will be paid out to you. You can spend it on whatever you like – a large bag of crisps or a holiday. Hurrah.
- Accumulation: the gains will be rolled up and reinvested in the fund, producing more income. In other words, you get income on your income. Slightly boring if you like crisps, but also hurrah.
Yes, yes. But which is it to be?
The decision is down to goals.
- Do you need income now?
- Or can you wait for your investment to grow over the long-term?
The income option – often abbreviated to "inc" – is generally used by retirees to bolster pension payments. Don't need the cash flow now? Then accumulation – "acc" – is a no-brainer because of the magic of compounding.
So why is compounding so good?
Compounding is the self-raising flour or the non-iron shirt of investing. Here’s why.
Take two investors. They each put a single payment of £10,000 into a ‘Fund X’ 20 years ago.
- One went for the income version; the other went for accumulation.
- Let’s say the fund delivered growth of 4% a year and income of 3% a year after charges.
- After 20 years, the investor who took income has a fund of £21,911. But she has also received £9,291 in cash. That’s a total of £31,202*
- Meanwhile, the accumulation investor, whose income was reinvested in the fund, would have £38,697.
- Accumulation made another £7,495 more, thanks to compounding. Magic indeed.
*tax has not been taken into account.
We’ve also illustrated, in an infographic, the differences between income and accumulation funds when considering investments.