Vanguard ESG accumulation fund- compounding?

Lucygs

Hi all. I'm struggling with what is probably a very basic question. A year ago I opened an 'ESG Developed World All Cap Equity Index Fund' with Vanguard. I chose the accumulation option. I thought that this index fund would receive compound interest which would start to grow my fund even more, but I'm not sure if I have the right product or if I have misunderstood how compound interest works. 

E.g. if I added £1000 to the index fund and it earnt interest of 5%, I thought I would then be earning 5% interest on £1050, then on £1575.5, etc. etc. (in addition to me adding an amount into the fund each month). But I'm not clear from my account if this is happening and I'm struggling to find an answer from my research. Can anyone help?

Thanks!

george4064

The compounding happens underneath the surface (in this case, in the price per unit of the fund). 

You won’t be able to explicitly see the benefits of compounding that’s taking place, but you can see the difference by comparing the total return of the Accumulation vs Income share class (if that is possible on Vanguard’s website, otherwise can try trustnet.com)

Thrugelmir

The fund has an historic yield of just 1.08%. Where have you obtained the 5% interest figure from? 

You do realise that the fund you have choosen is 5 out of 7 on the risk scale. Your capital can both rise and fall in value. To quote Vanguard. 

2. The Fund is rated 5 due to the nature of its investments which include the risks listed below. These factors may impact the value of the Fund's investments or expose the Fund to losses.

- The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.

- Movements in currency exchange rates can adversely affect the return of your investment. - Investment risk is concentrated in specific sectors, countries, currencies or companies. This means the Fund is more sensitive to any localised economic, market, political or regulatory events.

eskbanker

Lucygs said:

I thought that this index fund would receive compound interest which would start to grow my fund even more, but I'm not sure if I have the right product or if I have misunderstood how compound interest works. 

Sounds like you understand how compound interest works but don't understand investing!  Equity funds don't earn interest, but pay out dividends (reinvested in acc funds) and also benefit from capital growth - both can effectively result in growth on growth but it's not really directly comparable to compounding of interest as such....

Lucygs

Thanks everyone. So obvious next question is what is the best index fund to get in order to get actual compound benefits?

eskbanker

Lucygs said:

Thanks everyone. So obvious next question is what is the best index fund to get in order to get actual compound benefits?

At the risk of being blunt, what makes you believe that that would be a sensible basis on which to select an investment?

The closest equivalent to 'actual' compounding in investing is dividend reinvestment, which is inherent in every accumulation fund - some equities (and consequently funds) will be more oriented to dividend income than capital growth, but it's generally considered more appropriate to invest on a total return basis, so picking investments based on dividend yield is unlikely to be suitable if you're after growth rather than income.

dunstonh

Lucygs said:

Thanks everyone. So obvious next question is what is the best index fund to get in order to get actual compound benefits?

It would mean you need to adjust your portfolio to have an income focus instead of a total return focus.  Index funds are more about total return in the regions/countries they invest in.

Thrugelmir

Lucygs said:

Thanks everyone. So obvious next question is what is the best index fund to get in order to get actual compound benefits?

The obvious answer is firstly to understand better the stock markets. Their function, how they operate and what you are investing in. Index funds use man made benchmarks that provide something to make comparisons against. Certainly not a pancea for making profitable gains. 

Notepad_Phil

Lucygs said:

Thanks everyone. So obvious next question is what is the best index fund to get in order to get actual compound benefits?

I'm not sure why you prefer one over the other if you're just going to reinvest the entire dividend back into the same fund. Are you expecting that using an Income type unit of a fund will result in your having more money after several years of growth than if you had invested within an Accumulation type unit? Because that's not the way it works.

Also note that on certain platforms that you may have to pay charges to allow dividend reinvesting so you end up having those charges to take into account too. I've no idea on what Vanguards approach to this is for your particular fund.

The only reason I can think of specifically wanting to reinvest back the dividends into the same fund is if you were not investing within a tax sheltered account (e.g. a S&S ISA or pension) in which case you may want to see the dividends come in for tax reporting purposes.