Investing in funds: income vs accumulation
If you decide to invest some of your savings in funds, you may be thrown to see that most funds are marked as either income funds or accumulation funds. One of the most common questions our clients have is: which should I invest in? To know the answer, it’s important to know what sets these two types of fund apart.
• Income funds pass any gains that the fund makes on to you, as an investor.
• Accumulation funds combine all the gains the fund makes and reinvests them back into the fund, in turn increasing its value for you.
Spend it now or save it for later
Whether you want to choose income or accumulation funds is often a matter of timeframe. With accumulation funds, there is no immediate pay-off, because you are essentially choosing to reinvest your income back into the funds. If, on the other hand, you want to rely on gains made from your investments as part of your annual income, then choosing income funds may be the right option for you.
The benefits of compounding your interest
If you don’t strictly need income from your investments but you’re tempted to take it anyway, it’s time to have a think about whether it’s really worth it. Reinvesting gains in accumulation funds is about more than just watching your money grow that little bit more – over a long period of time, it will actually make a huge difference.
This is because of compound interest, which is interest that is compounded over many months and years. If you invest £100 in an account which pays 10% interest every year and you take that interest as income, after 10 years you will have made a total of £100 of interest from that account. If, on the other hand, you choose to leave the interest in the account, you will make £10 of interest in the first year, but £11 in the second year – because your account now has £110 in it. The third year you will make £12.10, and the fourth year you will make £13.31 – and so on. Obviously these figures are only small, but with larger sums of money it isn’t difficult to see how it can add up.
Investing in funds – where to find out more
For expert advice and assistance in making the most of your investments and meeting your financial goals, please don’t hesitate to get in touch.
Or visit our web page to find out how we can help you with investments.