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Share Classes: Accumulation vs. Income

When buying a fund, should you buy the accumulation or the income share class?

Alanna Petroff 20 July, 2012 | 5:31PM

This article is part of Morningstar.co.uk's Equity Investing Week.

After completing your due diligence, you’ve decided to buy a new fund. It’s called Fantastic Fund. You’ve looked at all the other funds out there, but Fantastic Fund is the one for you. But now comes another decision: which share class should you buy? You can choose between the “accumulation” or “income” share classes, otherwise known as “Acc” or “Inc”.

Buying the accumulation share class would mean that your net income from Fantastic Fund would be reinvested back into the fund, with no charge to reinvest. The other option – the “income” share class – would pay out all of the fund’s net income to you in cash. This would allow you to use the money towards other investments or living expenses.

What to do?

“We would always advise clients to buy the accumulation share classes. With accumulation, the reinvestment of the dividends provides a large portion of your total returns,” says Mark Preskett, investment consultant for Morningstar Investment Management Europe.

However, Preskett adds one caveat: you should choose the income share class if you are going to be relying on the fund’s income for your living expenses. But that should typically only happen in retirement, he says.

While all investors are different, as a general rule Preskett advises buying funds with accumulation share classes throughout your working years, and then transitioning into income share classes when you retire. Of course, rebalancing your portfolio is also important as your needs and life change over time, he says.

Martin Bamford, a chartered financial planner and managing director at Informed Choice, echoes Preskett’s sentiments. Generally the accumulation share classes are for pre-retirement investors, while the income share classes are for post-retirement investors, he says.

But what if you’re approaching retirement and you own a fund with Acc shares, but you want to switch to Inc shares and stay invested within the same fund? What then?

You may incur charges to switch from the Acc to the Inc share classes, but that all depends on rules laid out by your fund provider and the platform on which you are buying/selling your fund, explains Preskett. Some places, such as various life insurance companies, offer investors the option to switch between share classes for free, he says.

Preskett also points out that some funds only offer individual investors an income share class option, but those funds are few and far between.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.