Accumulation versus income funds? The basics

When you invest in a fund, you’ll usually be asked to choose between accumulation or income options (technically called ‘share classes’). The underlying investments are the same – the difference is what happens to the income those investments generate.

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What is a fund?

Investment funds are a collection of assets – usually shares, but sometimes other financial products – managed either professionally by a fund manager or ‘passively’, without a manager. They pool together money from multiple investors and spread it across a wide range of company shares or other investments.

While picking your own shares can be rewarding and have its benefits, many everyday investors find it easier – and sometimes cheaper – to invest through funds.

What are accumulation funds?

Accumulation funds are designed for investors who want capital growth. When you hold an accumulation share class, any income the fund earns (such as dividends from shares or interest from bonds) is automatically reinvested back into the fund.

You won’t receive regular income payments; instead the value of your investment grows as income is reinvested. These funds are popular for pensions, ISAs and for investors who don’t need an income today but want their money to grow over time.

What are income funds?

Income funds are designed to provide a regular cash payment. The fund pays income to you, usually monthly, quarterly or biannually (twice a year). You can choose to receive this directly into your bank account or keep it as cash within your ISA, pension or investment account.

With an income fund, the fund will grow more slowly than the accumulation version of the same fund because the income is paid out rather than reinvested. Investors looking for an income – for example those in retirement – often choose this version of a fund.

How to spot the difference

Many fund providers offer more than one type of the same fund (for example, both accumulation and income versions), and these different types are known as share classes.

The easiest way to tell them apart is the fund name:

• Income funds will normally have 'INC' in the fund name (or sometimes ‘DIS’, which means the income is distributed to investors)
• Accumulation funds will normally have 'ACC' in the fund name (or will sometimes be labelled ‘capitalising’ or simply ‘growth’)

How do share classes work?

Share classes are different versions of the same fund. They invest in the same portfolio and follow the same strategy. But they can differ in things like fees and charges (decided by the fund manager), or who they’re designed for.

Why do you sometimes see so many different share classes?

Fund providers offer different share classes to meet different needs. Regulation has also played a part.

In 2013, the Retail Distribution Review (RDR) changed how advisers are paid. Before this, many funds included adviser commission in their charges. These older share classes often had higher ongoing charges for investors and frequently used labels like ‘A’, ‘B’ or ‘Retail’ in the name.

After the RDR, most new investments moved into ‘clean’ share classes that typically have lower charges and clearer pricing and often use letters like ‘Y’ or ‘Z’. Not all providers used these letters, however.

But there may be times when you still see older share classes, such as when existing investors continue to hold them, and platforms may still display them for historic reasons.

Which is right for you?

Choosing between an accumulation and an income fund comes down to your time horizon and what you want your investment to do.

If you’re investing for the long term and don’t need regular payments, an accumulation fund may suit you. Income is automatically reinvested to help your investment grow. But if you’re looking for a regular income, an income fund may be a better fit, as it pays out the income the fund generates.

The key is to choose the option that matches your goals and how you plan to use your money.

• Read: How could £48,000 grow into £72,000?
• Read: 7 investing rules of thumb
• Read: What risks come with investing? The basics

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Please be aware that past performance is not a reliable indicator of future returns. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.