Why are accumulation units more highly priced than income units and seem to show much higher gains?

14 March 2022

Question by Michael

Why are accumulation units more highly priced than income units and seem to show much higher gains?


Answered by Boring Money

Hello Michael,

This is a common question.

The difference is down to how the income yield from the investment fund (generated from the underlying assets contained within the fund) is treated.

With Acc (accumulation) units, the income yield is not distributed from the fund, it is simply rolled up within the fund. This works similar to an investor reinvesting the income from the fund when it is received but there are some differences in the calculation so it is important to highlight that it is an 'accumulation' not 'reinvestment'. The key point here is that with accumulation units you don't receive additional units when the income is reinvested but the unit price is raised.

With Inc (income) units the income yield is distributed from the fund on the distribution dates. This might be paid out to you, it might be added to your portfolio's cash account or it might be reinvested to buy additional units in the underlying fund (but at the same unit price).

Compounding (who some say is the eighth wonder of the world!) is at play here. If you leave the income in the fund (through accumulation units) your investment will grow faster. If you take it out it will grow slower in comparison although you will have the benefit of the income yield to spend.

Income yields can be very different across a range of funds, so the relationship between the two different unit types is specific to that individual fund.

Important note: if this is a taxable portfolio i.e. outside of your pension or ISA; the accumulation units still generate a taxable income even though this is rolled up within the fund. In this case your investment provider should provide a tax voucher (probably after the end of the tax year) showing the taxable distributions that may need to go on your tax return.

I hope this helps but please do get in touch if you need any further clarification.

Best wishes

Laura

Answered by

Boring Money