Help me understand "accumulation" versus "income" funds

benrobin101

Hi all,

I need some help! I've read so many websites to try and understand the difference between accumulation and income funds, but there's something I still just don't get.

So the standard explanation you read is this: "With income units, income is paid out to fund holders as cash. This could provide the investor with an income stream or the cash could be reinvested to buy additional units. With accumulation units income is retained within the fund and reinvested, increasing the price of the units. Generally, for investors who wish to reinvest income, accumulation units offer a more convenient and cost-effective way of doing so." taken from the HL website.

I can't make sense in this when I look at the different performance of income versus accumulation funds in my portfolio.
Some examples:
My income funds make sense to me.. I bought £1000 of fund x (income class), it's risen 18% since, so fund reads cost £1000, profit £180.. current value £1180/
My accumulation funds however, it seems that accumulation has lowered the cost price.. meaning the % gain is of a lower total, = less profit. E.g. I bought £1000 of fund x (accumulation class), it has since risen 1.49%... but the fund reads, cost=£987.60, profit="14.67, current value="1,002.27.

So I'm terrible at maths, so I'm sure I'm missing something obvious. But I feel like I bought £1k worth of a fund, and "accumulation" is reducing that value so instead of getting £1014, I get £1002..
I've noticed this pattern across all my funds, and it's making me think I should just buy income class shares, but all the advice says if you're investing for the long term I should buy accumulation...

Can anyone bring some light to this for me!?

AnotherJoe

I think Something else is going on unrelated to inc /acc. Acc doesn't "reduce value".
No idea what, but if you bought £1k of a fund, then it should show the cost as £1k, irrespective the fund type.
Could it simply be that some of the funds you bought have a buy / sell price and coincidentally this has been ones that happen to be acc? Can you give an example of one of your acc funds this applies to ?

benrobin101

Hey, I did actually call HL to discuss it with them, and they said something about accumulation finds reducing the cost price .. but I didn't really understand what they told me to be perfectly honest..

benrobin101

So the funds I have where I've noticed a reduction in the "cost price" are:
- First State Asia Focus Class B - Accumulation (GBP)
- iShares 100 UK Equity Index Class D - Accumulation (GBP)
- iShares Emerging Markets Equity Index
- Legal & General US Index - Class C - Accumulation (GBP)
- Vanguard US Equity Index Accumulation (GBP)

benrobin101

So I actually just spoke to HL again and got a more helpful adviser..it appears the reduction in cost price I am seeing is just a one off thing related to something called "equalisation" that has something to do with the fact that I bought the fund between dividend payment dates?

ro2778

I think the reason you tried to invest £1k in a fund but only ended up investing £987.60 is because the fund only allowed you to buy whole numbers of units. So the closest it could get to £1k using this principle was £987.60. Indeed, it has increased in value by 1.49% because £987.60*1.0149 (ie. 1.49%) = £1002.

The difference between income and accumulation is a separate issue. If you buy a share or a fund for income, that means you will receive dividends, where a certain % of your investment is paid out in cash to your account every year. The interval of the dividend may vary between funds, at least once per year, or split over several payments in a year. The reason accumulation is more efficient is because if you plan to reinvest a dividend then you might be charged a fee to reinvest the cash dividend to in effect buy more units of a fund. Where as in an accumulation fund, you don't ever receive a dividend so money is not taken out of the fund to pay these dividends and can be reinvested by the fund managers (if actively managed) more efficiently. However, if you want to keep the dividends and not reinvest them, or your not sure what you will do with the dividend income then many people choose to take the payout.

I think the fact that your income fund out performed your accumulation funds is just because the income fund is having a good year. Such is the nature of investing.

ColdIron

What you are seeing is the effect of Equalisation Payments. Keeping it very very simple your cost is whatever your cost was (say £1,000) but your tax cost will be slightly different and a little lower (your £987.60). What you see is HL trying to be helpful by showing you your gain as the tax man would see it but it's just a presentation/accounting thing. Some people don't agree with the way HL present this and other platforms may display it differently. I wouldn't get too hung up about it

From https://www.hl.co.uk/funds/fund-faqs

• When you buy a fund between ex-dividend dates any income which has been generated, but not yet paid out, is included in the price you pay for each unit.
• Because of this, the first income payment you receive is made up of two separate parts. The first part is the income generated after you purchased the fund. The second part is the income which had been generated before you invested and included in the price you paid for each unit. As far as you are concerned this is not really income at all, it is a return of some of your initial investment, and your cost figure will be adjusted to reflect this return of capital. This is known as an 'equalisation' payment.

Johnnyboy11

Another couple of things to look out for...


Firstly, the dividends from your Income Funds will be held as cash and dipped into monthly by HL to pay their platform fee (0.45% per year). So have a look at your account transaction history to see what's coming in and going out.


Secondly, check the number of units you hold in your Accumulation funds, as these may have increased or decreased, depending on your funds performance and again HL fees (If you've no cash, HL will sell units to get their fee).

ColdIron

Johnnyboy11 wrote: »

Secondly, check the number of units you hold in your Accumulation funds, as these may have increased or decreased, depending on your funds performance and again HL fees (If you've no cash, HL will sell units to get their fee).

Hard to see them increasing based on either of those factors, or any others come to that

AnotherJoe

Johnnyboy11 wrote: »

Another couple of things to look out for...


Firstly, the dividends from your Income Funds will be held as cash and dipped into monthly by HL to pay their platform fee (0.45% per year). So have a look at your account transaction history to see what's coming in and going out.


Secondly, check the number of units you hold in your Accumulation funds, as these may have increased or decreased, depending on your funds performance definitely not and again HL fees (If you've no cash, HL will sell units to get their fee) possible but unlikely and wont happen to all funds just one at most.

Nope. see above in red.

Johnnyboy11

AnotherJoe wrote: »

Nope. see above in red.

Well I just checked my HL account and I definately get units added, both VLS60 and Fundsmith. Small amounts mind. There are even contract notes available.