The world of mutual funds is varied and investors can be confused when looking for a financial instrument for their needs: the differences between an accumulation fund and a distribution fund must be known in detail.
There are various types of mutual investment funds and it is good to clarify the most classic of distinctions: what are accumulation and distribution funds? When we start looking for an investment fund it can happen that we are faced with two versions of the same fund. At a quick glance they may look identical, but in reality they are not. Accumulation funds are typically marked with the word ACC, while those with distribution by the acronym DIS.
Accumulation funds: the “magic” of capitalization
An accumulation fund does not pay out any proceeds (coupons, dividends, capital gains from the purchase and sale of the fund’s securities) because the management company automatically reinvests them in the fund itself, in technical jargon it is said that “the proceeds are capitalized“.
The accumulation of additional cash has the main effect of increasing the value invested in the fund. Typically, accumulation funds can be a valid solution for those who want to build capital in the long term and do not want to “waste” profits over time, but prefer to invest them directly in the fund.
Distributing funds: for those who want periodic liquidity
A distributing investment fund pays out the proceeds from coupons of bonds and stocks in which it invests, guaranteeing a cash flow to its subscribers. The total return of a distribution fund therefore consists of two parts:
- periodic coupon flow (fund proceeds): at predefined maturities – usually three, six or twelve months – the management company distributes all or part of the fund’s profits as indicated in the prospectus
- capital income: the capital gain (or loss) that occurs at maturity, i.e. the revaluation (or devaluation) of the securities in which the fund has invested
Distributing funds are suitable for investors who want a periodic income and supplement income to meet their spending needs. Those who decide to invest in this type of instrument will benefit not only from paying an annuity, but also from the advantages of a managed savings product.
Furthermore, when the dividend is distributed, the price – and therefore the fund’s performance – falls simply because the dividend is “detached” in the form of cash.
Investment strategies: distribution fund or accumulation fund?
As is clear from what has been explained so far, the correct investment strategy depends mainly on the needs and requirements of the investor. You must focus on your goal: do you want a periodic and supplement the income, have “extra” income for spending needs? Then invest in distribution funds. Do you want to build long-term capital by automatically reinvesting your earnings into the fund? Then the accumulation funds are for you.