Dumb question about Funds

pantsdr

I'm sorry if this sounds really dumb to some of you, but can someone tell me how the growth, interest, dividends, work with funds.

For example if I buy fund X, predicted growth 12% over the next year, what do I do with it? Do I need to keep selling it and reinvesting in the same fund?i.e after its increased by 1% do I sell and re-invest it to accumulate/compound the interest?

OR

If I buy fund X from HL do I just leave it in there? and say in a year's time £100 will become £112 fund and I can sell then?How do they calculate growth/interest and when are dividends paid out etc

a7man

There are many different variations of funds. Some accumulate capital (growth) by reinvesting any interest/ dividends that are generated - this provides no income in merely capital growth.

Dividends are paid out of company profits, they can be calculated yearly or half yearly depending on the company. The amount of dividends paid out depend on the company who has offered the shares.

Obviously you can also have a combination of growth and interest in some funds.

When to buy/ sell funds depends on a lot of factors - funds are generally for long term investments of 5yrs + as you are also liable to lose capital, and this will take allow for short term variation.

Whether to go for interest or 100% growth depends on various factors - for example a higher rate tax payer will aim for 100% growth to limit the tax paid on the interest/ dividends.

pantsdr

a7man wrote: »

There are many different variations of funds. Some accumulate capital (growth) by reinvesting any interest/ dividends that are generated - this provides no income in merely capital growth.

Dividends are paid out of company profits, they can be calculated yearly or half yearly depending on the company. The amount of dividends paid out depend on the company who has offered the shares.

Obviously you can also have a combination of growth and interest in some funds.

When to buy/ sell funds depends on a lot of factors - funds are generally for long term investments of 5yrs + as you are also liable to lose capital, and this will take allow for short term variation.

Whether to go for interest or 100% growth depends on various factors - for example a higher rate tax payer will aim for 100% growth to limit the tax paid on the interest/ dividends.

So if it is 12% accumulating fund does that mean e.g in year the capital will have grown by 12% by me not having done anything other than just buying the fund?

And if its an income fund how, what and when do they calculate the 'income'.

Thanks

Lokolo

the 2 types are called: Income and Capital Growth.

Income is dividend payments, Capital Growth is growth of the fund (the 12% bit).

For income I assume (I don't know this) that the fund manager (the person who decides where to put your money etc.) decides how much the dividend would be. Obviously the more he gives out the more people like but he is restricted to how much money he has earnt from the funds.

The dividend is given out at different times of the year depends on the fund:

http://www.h-l.co.uk/fund_research/security_details/sedol/B1337P6.hl

An example. Income details: Income paid quaterly. so 4 times a year.

Distribution date is 31st October 08 for the next one, with Ex-dividen date as 1st Septmeber. You will get the dividend on the 31st october in this fund if you own some of it on the 1st September.

turbobob

You also need to differentiate between what is capital growth and income. If you think about equities as an example, i.e. shares. If you hold shares in a company they pay shareholders dividends once or more per year. These dividends are classed as "income". Shares also go up and down in price as they are traded on the stock market. If you bought shares at £1 each and they went up in value to £2 each, that would be classed as capital growth.

Its quite similar with corporate and government bonds (loans basically) which pay a regular income called a coupon. These bonds are also traded and have the potential for capital growth. Funds may be equity only, bond only, property etc or may invest in a mixture of asset classes.

A lot of funds will give you the option of buying income units or accumulation units, as you might have seen.

Accumulation units will automatically re-invest the income and will reflect this by increasing the unit price.

Income units distribute their income. This income can either be paid out (to a nominated bank account for example) or it can be automatically re-invested to buy more units of the same fund.

turbobob

pantsdr wrote: »

So if it is 12% accumulating fund does that mean e.g in year the capital will have grown by 12% by me not having done anything other than just buying the fund?

Remember with most funds there are no guarantees at all and the value will fall as well as rise. So a fund could grow 12 % or more in a year, just by you having done nothing more than invest money.

On the other hand one of my funds has fallen about 15% in just over a month...

If there was a fund which could guarantee to produce a return of 12% a year I think most of us would have invested in it :money:

LongTermLurker

a7man wrote: »

There are many different variations of funds. Some accumulate capital (growth) by reinvesting any interest/ dividends that are generated - this provides no income in merely capital growth.

Not quite - There are Income Funds and Growth Funds, then there are Income Units and Accumulation Units.

Income funds pay dividends, Growth funds pay little or no dividends - the underlying companies (not the fund manager) put all or most of their profits into making their company bigger.

Income Units will allow you to take a regular income from the fund, whereas with Accumulation units, income is re-invested into the fund.

So "Income/Growth Fund" refers to the type of investments held, and the way those companies manage their capital, whereas "inc/acc units" refers to what the fund manager will do with any income. That's why it's quite feasible for a 20 year old to want some accumulation units in an equity income fund :cool:

Worth noting as well, outside an ISA, "income" is subject (unsurprisingly) to income tax and "growth" is subject to Capital Gains Tax. Even within an ISA, you will pay income tax on dividends, but you won't pay income tax when you withdraw the money later!

(edit - just seen Turbobob's reply above, which I seem to have duplicated a bit - at least we agree

Brum_Man

LongTermLurker wrote: »

Income funds pay dividends

Unless it's a bond fund in which case it will pay interest, and therefore means that the tax can be reclaimed within an ISA.

LongTermLurker

Brum_Man wrote: »

Unless it's a bond fund in which case it will pay interest, and therefore means that the tax can be reclaimed within an ISA.

correct - well spotted

dunstonh

Speaking of tax wrappers, they also need to be considered as well. The same funds can be bought unwrapped or in one of the money tax wrappers available in the UK (unwrapped would be in UT/OEIC form. ISA, Onshore bond, offshore bond and pension are the other mainstream versions but you also have other investment types available as well, such as investment trusts, ETFs etc)