Question about Inc Vs Acc funds

musashi10

Hi, novice investor trying to broaden my knowledge.

Firstly if my assumption is correct.

1. Income fund means that at set dates you recieve money from your fund. Acc means that any money made, automatically goes into your fund at the current price???

2. How does a fund calculate the profits to be distributed? Are all profits distributed to investors after the fees?

3a) If I wanted to invest in Income fund, am I right in thinking that the most important figure I should look out for is the Yield %?

3b) I have taken the yield % to mean, the historic value in % terms of payments made to investor from the accounts? Essentially for Acc account it would mean the re-investment amount?

4) The capital growth of the account only concerns investors when you sell the fund? (and of course asessing whether to buy too)?

Thanks

musashi10

I also have another question.

For funds be it equity or bond, should I worry too much about buying them for a decent price? Like I would with a stock?

When I look at trends past 10 years, rarely seems to be a significant downward trend that lasts for more than about 3 years. Is the assumption that markets will in the end always go up?

How does that work?

Basically I'm wondering what kind of capital value management strategies people employ when trying to build up a fund portfolio to protect their capital amounts?

Thanking you.

bowlhead99

musashi10 wrote: »

1. Income fund means that at set dates you recieve money from your fund. Acc means that any money made, automatically goes into your fund at the current price???

Basically yes. If you hold Acc units they take the money they would have paid out under the Inc flavour, and stick it back in the fund ; the Acc units are then more valuable than the Inc ones.

So if the value per share or unit was 100p, after a year it might be worth 106p. In the Inc fund they might pay out 3p per share leaving 103p of assets in the fund and 3p in your hand. While in the Acc fund they will only notionally give you the 3p per share ; you will still have to pay tax on that declared dividend if you're a higher rate taxpayer and not holding it inside a SIPP or ISA, but they automatically stick the 'spare' cash back into the fund so the fund still has more cash and therefore can buy more assets with the spare cash.

This results in a higher price for every unit that investors hold in the Acc fund compared to the Inc fund although your personal total return is the same: 106p before tax from a 100p investment.

2. How does a fund calculate the profits to be distributed? Are all profits distributed to investors after the fees?

It is a management decision, sometimes driven by a formula or a strategic target. They want to be able to keep making distributions each year and to grow your assets so that the distributions don't get smaller and less useful due to inflation etc. So some cash will typically be retained to re-invest even if it is not an Acc fund, before they declare the divs.

Some will aim to distribute a fixed, high, proportion of their income because that's what their investors want. Some funds are invested in assets that don't produce a lot of income and because of the types of assets they hold, their investors don't expect income, and so even if they get some the manager will not necessarily distribute every last penny, simply reinvesting it instead.

3a) If I wanted to invest in Income fund, am I right in thinking that the most important figure I should look out for is the Yield %?

Not necessarily. Sure, higher yield is better in terms of cash in your pocket but for a fund to keep generating high yields, can point to underlying assets which are inherently more risky. Like some companies pay very high yields (interest rates) on their bonds because they are less creditworthy, more likely to go bust, and they have to pay high interest to keep people giving them finance.

Also, whether yield is absolutely everything to you depends on why you are holding the fund. If you're investing in a fund that invests in the equities and bonds of a set of blue-chip companies that give it enough cash to pay say a 3-4% yield, perhaps it will perform better in an economic downturn than one that is focused on high growth smaller technology companies that pay no dividend and are not as solvent. But on the flipside when the economy is booming you don't necessarily want your portfolio to be full of boring cash cows and the fund performance may lag behind the funds that have sexier companies paying lower yields but focussing on growth instead.

So most people's portfolios will have a mixture of income and growth and bit-of-both funds. Some people will hold the Inc flavour rather than the Acc flavour of all these various funds, to get the cash in their hand and re-invest it in whatever they want each year, giving them more choice and an easy way of rebalancing their portfolio as they go along. They will find they have some high yields and some low yields across their portfolio but none of them necessarily imply a bad fund.

If you were deliberately investing in an Income (versus ACC) flavour of an Income (versus Growth) type of fund, and the yield was very low, you might question how good it was at meeting your goals because it doesn't seem to be delivering the desired results. But if you were investing in an Income (versus ACC) flavour of a biotech fund, the yield might sound a bit rubbish as a percentage of value but the fund could double its assets in a year.

3b) I have taken the yield % to mean, the historic value in % terms of payments made to investor from the accounts? Essentially for Acc account it would mean the re-investment amount?

It is the value paid out as a proportion of ending value. If you are not physically taking the payout, as in an ACC fund, then it matters less. Either way, the 'total return' is important.

4) The capital growth of the account only concerns investors when you sell the fund? (and of course asessing whether to buy too)?

In terms of paying capital gains taxes or whatever, growth on paper while you are holding and not selling, can be ignored until you sell it.

But yes the growth is important when selling because it determines how much you get paid out - more is better. And it is important when assessing whether to buy because it gives you an indication of how it might perform in terms of volatility up and down.

Focussing exclusively on yield and ignoring growth is poor investing. For example if a fund is growing to a higher capital value and still paying out 2% of its share price, then the ££ amount of your annual dividend is twice much cash to spend or reinvest after it has grown to a 200p per share price, than it was at 100p a share!

Whereas another fund might grow its yield from paying 2% of its share price to paying 2.5% of its share price a few years later, which sounds like a good story but if the growth is low and the share price is the same 100p as it used to be (or even less) then the absolute dividends of 2% or 2.5% are no longer anything to write home about in real terms, being same or less cash per year as they always were.

bigadaj

I think you need to do some research and reading really, buy a couple of books and read up on sites like monevator, motley fool etc

musashi10

Thanks to all.

Can you recommend any decent books?

bowlhead99

musashi10 wrote: »

For funds be it equity or bond, should I worry too much about buying them for a decent price? Like I would with a stock?

When I look at trends past 10 years, rarely seems to be a significant downward trend that lasts for more than about 3 years. Is the assumption that markets will in the end always go up?

How does that work?

The fund price is a reflection of the current value of the assets it holds. So they will go up and down with the markets. Some times in a year or in a five-to-ten year economic cycle are better than others, to buy, because the underlying holdings are cheaper. Timing them is pretty tricky though because you never know if a falling value will continue to fall or recover or a rising value will continue to rise or reverse providing a better opportunity later.

If you were looking at an individual stock, you might think it is priced a bit high for what it is, and try to wait until later in the day or the year to buy it. If you are looking at a whole basket of stocks via a fund, you can try to do that but you will find that while Tesco and Mothercare got cheaper, Sainsbury and ASOS got more expensive and you should probably have just bought your 'UK retail' fund months ago and enjoyed the underlying dividends since then.

Some people would just focus on the long game and drip in money whenever they had it available, some would deliberately pay in slowly a fixed amount a month, some would put their lump sum in ASAP to get the greatest time in the market that they can, accepting that all funds drop and rise from time to time but the overall story should generally be upwards.

Basically I'm wondering what kind of capital value management strategies people employ when trying to build up a fund portfolio to protect their capital amounts?

Generally to be diversified in the different types of funds you have so that they don't all rise at the same time or the same pace but they also don't fall at the same time to the same extent.

If one is underperforming the average of everything else you hold, buy more of it with the cash from selling part of the ones that have done better. Then you are always selling high to buy low but never completely selling out of a good fund. And keep at least some cash back (or at least invested in less volatile assets) to take advantage of times that generally seem very cheap.

For example at the moment many shares and bonds are generally quite expensive - at least more than they were a year or five ago - so I would try to skew my purchases towards buying more of the less expensive ones but not completely give up on buying altogether.

And you never know when a buying opportunity like March 2009 will come around again, so there's no point already having absolutely all your assets in equities or you will never be able to buy in at those crazy cheap prices (unless you are willing to dip into overdrafts and credit cards to load up - which is high risk but some people here will have done it!).

ColdIron

bowlhead99 wrote: »

It is a management decision, sometimes driven by a formula or a strategic target. They want to be able to keep making distributions each year and to grow your assets so that the distributions don't get smaller and less useful due to inflation etc. So some cash will typically be retained to re-invest even if it is not an Acc fund, before they declare the divs.

Far be it for me to question your almost limitless knowledge in these matters bowlhead, but I'm going to anyway Is this true for Unit trusts and OEICs? I always thought it was a feature of Investment Trusts.

gadgetmind

ColdIron wrote: »

I always thought it was a feature of Investment Trusts.

Yup, ITs manage their own dividends and can keep a reserve to tied them over lean times.

Open-ended funds have to pay out everything they receive, which means that income can bounce around.

gadgetmind

bowlhead99 wrote: »

(unless you are willing to dip into overdrafts and credit cards to load up - which is high risk but some people here will have done it!).

Of course, anyone who has a mortgage and also invests in equities is making a geared investment.

bowlhead99

ColdIron wrote: »

Far be it for me to question your almost limitless knowledge in these matters bowlhead, but I'm going to anyway Is this true for Unit trusts and OEICs? I always thought it was a feature of Investment Trusts.

Sorry I did blur the lines there.

If you're an authorised fund, you have to pay out all your income so that it's taxable in the hands of us the investors - which is how they get to not pay any tax themselves at fund level. This is for the year as a whole, though, so you can distribute high or low interim dividends as long as you get to the right place in the end. Investment trusts work to different rules and as Gadget mentions this can allow them to smooth income over different years

If you're an offshore fund there used to be an HMRC rule about needing to distribute 85% of your income to qualify as a 'distributing fund' and avoid rolling up too much income as capital gains in the hands of UK investors. Now after a transitional period the funds typically have 'Reporting Fund' status where they tell the investors what profits were made and leave it to the investors to account for it, without necessarily distributing it. But that's beyond investing 101!

gadgetmind wrote: »

Of course, anyone who has a mortgage and also invests in equities is making a geared investment.

That's quite true - I could not hold the level of investments I do if I had paid off several hundred thousand pounds more of my mortgage or paid cash for my house. So the mortgage is gearing my house, my portfolio, my holidays, my car and my trips to the supermarket despite only being secured on my house.

musashi10

Thanks for all the help. I think what I'm going tio do now before investing any more cash is some reading on the subject.