When investing in funds, you may occasionally see the letters 'Acc' or 'Inc' after fund names. These describe two types of fund units you can invest in: 'accumulation' or 'income'.
Many types of fund let you choose between accumulation and income units, including open-ended investment companies (OEICs) and unit trusts.
So how do Acc and Inc units differ?
It all comes down to how the fund deals with income it receives. Every fund receives income from the underlying holdings in its portfolio – be it dividends from shares, interest payments from bonds, or rent from property.
If you invest in accumulation (or Acc) units, your part of this income will be automatically reinvested within the fund. This will be reflected in the value of your holding, which will increase.
If you invest in income (or Inc) units, your part of the income will be paid out to you over the course of each 12-month reporting period. That means you'll receive cash payments for holding the fund.
Should I invest in Inc or Acc funds?
It depends on what you're looking to get from your investments.
If you want to draw an income from your portfolio, it generally makes sense to invest in income units. This lets you earn money from the natural yield on your holdings, without having to sell any of them.
If you're looking for capital growth, you'll probably prefer accumulation units. But it depends – some growth investors prefer income units, so they can choose to reinvest their income in another investment, if they prefer.
You may find that some funds are only available in income units, but most platforms including AJ Bell, offer a dividend reinvestment service, letting you automatically reinvest your income in the investment that paid it.
When do income units pay out?
Funds with income units have set days each year when they pay out an income to investors. Some funds only distribute it once or twice a year, while others pay it quarterly or monthly.
Some funds smooth these payments, so investors receive roughly equal amounts with the balance swept up in the final distribution.
When do accumulation funds reinvest?
For accumulation units, the dividends a fund receives will be invested at the discretion of the fund manager.
They may choose to reinvest the dividends back into the stocks from which they came, or into the whole fund portfolio, or into other stocks, as they see fit. When the money is reinvested is also at the fund manager's discretion.
What are the tax implications of Inc or Acc units?
Income you receive from income units is taxed as either dividend or interest income, depending on what sort of assets are held within the fund.
Income reinvested in accumulation units is known as a 'notional distribution', and is taxable in exactly the same way as the income from income units. One important thing to consider is that income automatically reinvested in accumulations units isn't liable for capital gain tax (CGT). That meansyou'll have to keep a record of all the 'notional distributions', so you can adjust the calculation when you sell the investment to work out your capital gain.
This sounds complicated, but remember that you don't have to worry about tax if the fund you hold is held in a tax-efficient account like an ISA or SIPP. You'll only need to think about income tax or capital gains tax (CGT) if you hold the fund in a Dealing account.
Important information: How you're taxed will depend on your circ*mstances, and tax rules can change. ISA and pension rules apply. Remember that the value of investments can change, and you could lose money as well as make it.
These articles arefor information purposes only and are not a personal recommendation or advice.
Open an account
No matter how, why or where you want to invest, we're here to make investing feel good. Get started today.
Investing in Funds
Learn more about different types of funds and how to choose one for your portfolio.
