Accumulating fund

When the shares or bonds inside a fund pay dividends or interest, an accumulating fund keeps the money and reinvests it within the fund. No cash is paid to you; instead, the value of each fund share rises by the amount reinvested, net of costs. Many funds offer an accumulating and a distributing share class with the same portfolio, often labelled ‘Acc’ and ‘Dist’ or ‘Inc’ in the fund’s name. The two classes then have different prices but the same total return before tax.

Accumulating classes suit investors who want their income reinvested without the effort and dealing costs of doing it themselves, and they make compounding automatic. Tax is the common misunderstanding. In many countries the income is taxable even though you never receive it: in the UK, for example, income reinvested in a fund held outside a tax wrapper such as an ISA must be declared and taxed each year, and is then added to your base cost for capital gains tax. Germany taxes a notional minimum return on funds that pay out little or nothing. Whether accumulation is efficient depends on where you live and which account holds the fund.