What's the difference between income and accumulation funds?
Once you have done your research and chosen the right investment fund for you, you might be asked whether you want to purchase income or accumulation units. Find out what this means and what the right option for you is with our guide.
When you invest in a fund there will often be different types of shares class you can buy, most notably income or accumulation units.
Which is the right option for you will depend on your financial goals and need for cash.
What is the difference between investment and accumulation units?
Income units - as their name suggests - will pay any dividends the fund earns straight back into your nominated bank account.
Accumulation units are not paid to you and instead are reinvested into the fund for further growth.
This choice of share class enables you to decide whether your investment is totally geared to the future, or whether you would benefit from any income earned now.
Which is safer, income or accumulation units?
All investments involve some risk: profit cannot be guaranteed and the value of the fund can fluctuate.
The risk is relatively equal as the safety of your money mostly depends on where the fund invests and its investment strategy, rather than the share class that you buy.
However some might argue income units are slightly lower risk as each time income is paid, your exposure to the fund is reduced. However, withdrawing the earnings will limit the growth potential of your overall investment, which is a risk in itself if you don’t need the money and have longer-term financial goals to save for.
Should you choose investment or accumulation funds?
If you need a regular income from your investments then an income fund lets you marry short-term benefits of a regular income with some aspects of a longer term investment. This can be helpful if you are in retirement and many retirees will structure their pension investments in this way, in order for them to pay an income.
However, if you do not need an income from your investments, reinvesting dividends with accumulation units enables you to grow your wealth faster through the compounding of returns. This is because the income stays within the fund, boosting its value and giving it a wider base to grow from.
When it comes to deciding whether income or accumulation is the better choice for you, weigh up your short- and longer-term needs.