Accumulation funds - dividend ‘reinvestment and equalisation

adonis10

Being really thick here but can someone put in layman’s terms how the following benefits my investment please? I don’t own any more units so how do I benefit from the dividend?

[Deleted User]

Hi,

have a look here, from HL.

Audaxer

The dividends in an accumulation fund are automatically reinvested within the fund. You do not receive any more units but the value of your units are increased as dividends are received. If I have a VLS80 INC fund and receive a dividend of say £200, my fund value will be £200 less than your VLS80 ACC fund. I think the reason they show dividend details on the ACC fund is in case you need the details for tax purposes.

bowlhead99

adonis10 said:

Being really thick here but can someone put in layman’s terms how the following benefits my investment please? I don’t own any more units so how do I benefit from the dividend?

The fund receives various dividends from the portfolio of companies it holds, and interest from the bonds it holds, pretty much every week of the year. So, you 'benefit' from the dividends, which more than cover the cost of running the fund and there is spare income left over. 

Still, UK tax law says that to allow the fund to qualify as the type of entity which doesn't pay tax on its dividend income or capital gains, they have to 'pay out' all the income they get.  This leads to them declaring a distribution every so often.

If you wanted to receive that spare income rather than have it automatically reinvested in more shares of the underlying companies, you would choose the 'income' class of the fund, which pays out the cash to your holding account. You could use that cash to buy more units, or take it away and buy something nice for yourself.

In your case, you didn't want the cash so you chose to use the 'accumulation' version of the fund where they don't physically pay you any cash. The money will just get reinvested in more shares and bonds etc, and your fund units will be more valuable (per unit) than it would be in the 'income' class - because in the 'income' class, some cash is taken out of the fund units and sent to your holding account, while in the 'accumulation' class, it isn't.

If you're not using an ISA or SIPP product, you will need to know that £81.37 of income was allocated to you and re-invested into the fund, because the income is taxable (although your tax bill on the dividend may be £0 depending on your personal circumstances) and the re-invested money will increase the allowable cost of the investment for capital gains tax calculations when you sell it (although your CGT bill on the gain may be £0 depending on your personal circumstances).