Inc/Acc Unit Trusts clarification

mgarl10024

Hi,

I am quite new to investing, and so am currently working my way through Glen Arnold's book.

In it, he describes unit trusts and the difference between income and accumulation unit trusts. He says, on pg 108:

Some unit trusts pay out all income, after deducting management charges etc. on set dates (usually twice a year) in cash. On the other hand, accumulation units reinvest the income on behalf of the unit holders in units, and as a result the price of accumulation units tend to rise more rapidly than income units.

I've bolded the bit I'm having trouble with.

As a noddy example, there is a unit trust, with the same offer/bid prices (no spread). It has purchased securities to the tune of £10, and there are 10 units. A unit would therefore be priced at £1.

In my noddy example, the securities do not rise in value, and the income these securities generates is equal to their value, so the £10 of securities owned by the fund mean than £10 of income is received.

In an income fund, this £10 would be divided by the 10 units, and each unit holder would receive a £1 cash. The fund still has securities worth £10, 10 units, and each unit is worth £1.

In an accumulation fund, this £10 would be reinvested as more units. The fund would now be worth £20, there would be 20 units, and each unit would still be worth £1.

In either scenario, the price of the units is the same. What have I not understood?

Thanks,

Lokolo

You are confusing yourself massively between the number of units of securities in the fund, and the number of units of the fund. You don't even need to think about the securities.

A fund has 100 units, each worth £1. £100. The fund manager uses this £100 to purchase 200 shares in Company A.

Company A has dividends of 10p a share. The Fund will have an additional £20 (200 shares x 10p).

The income fund will release this £20 over the 100 fund units, so each fund unit will have 20p income. Each fund unit is still worth £1.

The accumulation fund will keep the money. The funds price has risen from £1 to £1.20. £100 original + £20 dividend, over fund 100 units. The Fund then consists of £20 cash and £100 shares.

mgarl10024

Ah - I think I've got it.

accumulation units reinvest the income on behalf of the unit holders in units

I read this to mean that in an acc unit trust, I would end up with more units than I started with, as a result of the income from underlying securities.

You're saying that the number of units I own remains constant?

xylophone

You're saying that the number of units I own remains constant?

Yes (unless you buy more, of course).

Go into Hargreaves Lansdown charting and by way of example, run Invesco Perpetual Distribution Inc against Invesco Perpetual Distribution Acc- look at the graph.

mgarl10024

Got it.

Thank you both very much for your help.