As part of our income special report week, we look at a fictional example of a fund manager, explaining what "income" and "accumulation" really mean.
Let me tell you a story about an award-winning fund manager.
He's called Henry Whittaker and he manages a very popular fund for St Paul's Asset Management (SPAM) in London. Since its inception in 2012, Whittaker's Robotics and Intelligence Equity fund (RIEF) has attracted nearly a billion quid in assets.
Despite a rough time last year and some noticeable outflows, performance is now sufficiently attractive that it could be worth jumping on the bandwagon before it's too late.
Off you go to your fund supermarket online (otherwise known as a retail investing platform), where you double-check your budget and get ready to buy. But suddenly you face a choice: do you buy the "acc" share class, or the "inc" share class?
Gulping, you sip your tea and open a Google tab.
What's The Difference Between Acc & Inc?
Stop. You may need that tea, but you don't need Google, because we're here to spare your blushes. So just what is "inc" and how does it differ to "acc"?
Before we began, let's just note one thing. SPAM and RIEF are entirely fictional examples, and poor Henry is just a figment of my imagination. But they're helpful examples that might help all this feel real without making it intimidating.
Put simply, "inc" and "acc" mean "income" and "accumulation", respectively. Usually, these are the two different unit options on offer to investors. Choosing one will affect how dividends are paid to you.
"Acc" units reinvest the dividends the fund receives on your behalf. That means that, when you buy RIEF from SPAM on your platform, the net income from the fund will be reinvested back into the fund at no charge to you.
Income units are different. Rather than reinvesting any dividends, income units pay them out into your platform's cash or ISA account, or just directly into your bank account.
At this point, it's worth noting many income funds are "acc" units designed to harness the power of compounding growth. By reinvesting dividends immediately, investors get all the benefits of the gathering momentum a fund will establish its investments are successful (in theory)
Note too that, in the event you choose an "inc" fund, you may have to decide when you get your money. Some funds will offer monthly, quarterly, bi-annual, and annual payout options.
Why Financial Planning is Important
First on your mind may be this: am I still an "income" investor if I'm picking the "acc" unit?
The short answer is "yes, absolutely", it's just that the income you sacrifice in the short-term comes back to you later in the form of (hopefully) higher returns.
But it all depends on what you are trying to achieve. Morningstar Investment Management (MIM) senior portfolio manager Mark Preskett has previously said the main benefit of "acc" units is the large portion of your total returns they provide.
However, he adds, you may wish to consider the "inc" unit if you are going to be relying on your fund's income for your living expenses.
If you're putting Whittaker's fund in your "satellite" portfolio so you can see how you get on and not smart too much if it fails, then, "acc" may be a good option. If your sanity in retirement depends somewhat on his skill, however, "inc" may be a better fit.
You may notice the elephant in the room here: you need a financial plan.
"We think income share classes are a natural way to build income portfolios but should be viewed as just one small part of what makes an income strategy successful," says Morningstar Wealth chief investment officer for EMEA Mike Coop.
"Getting the right balance between yield, income growth, capital growth, and risk, is critical – the key to meeting these goals is to have broad and deep capital markets research as well as manager research so you can identify and measure natural sources of incomes and growth in a cost-effective and risk-controlled way."
Put simply, don't dive straight in if you don't already have some semblance of what you want as your broader outcome. That's particularly the case given the fees you can incur if you change your mind and decide to revert to "inc" from "acc" or vice versa. Mistakes are costly. As ever, people with particularly complicated finances – or those who just want to outsource the decision – should seek professional advice from a regulated financial adviser.
Acc or Inc Fund Fees Could Cost You
And speaking of fees, make sure you know what you're paying for. If you tend to suffer from tunnel vision, remember there are always other options available to you.
"The basics of investing still apply," Coop says.
"Are you being charged a higher fee for the 'inc' or 'acc' share class and is that worth paying for? Are you aware of lower-cost passive income strategies that offer 'inc' share classes rather than assuming that only active strategies make sense. Is the manager and strategy right for what you need?"
Overall, just remember that you may be selling yourself short by not seeing the bigger picture.
"The two deadly sins of income investing are turning your capital into income, and taking excessive and often unintentional risk to generate income yield," Coop says.
"Knowing the tradeoffs you are making between income, growth and risk helps with setting realistic expectations and identifying strategies most likely to achieve them."
Henry Whittaker and SPAM may not be real, then, but the options available to you very much are.
