By Nathan Barnett, Editor at Finance.co.uk. Last updated 25th April 2024.
When you invest in your ISA or SIPP, investment funds pool money from multiple investors to invest in various assets, such as company stocks or bonds.
With an income fund, the fund manager will invest your money and other investors’ money in stocks or bonds that provide regular payouts in the form of dividends or interest. These payouts will be paid directly into your bank account.
Income funds can be a good option if you need a regular income stream from your investments. However, you should know that income payments may go up and down, so income isn’t guaranteed.
An accumulation or growth fund is designed to help you grow your wealth over a long period of time. This is because these funds typically reinvest any income they generate back into the fund.
This means your investment will continue to grow over time, compounding your returns and potentially resulting in more significant gains in the long run.
These funds pay low, or sometimes no, dividends, making them an option if you don’t need immediate returns and can wait out fluctuations in the market for an extended period of time.
Investment funds can be complicated for those new to investing, so it's essential to research them carefully before investing.
When you join an investment fund, you will buy shares that make up that fund. As the fund grows, the value of those shares may increase, allowing you to sell them for a profit.
It’s worth noting that you will have no direct control over how the fund is used. Instead, a fund manager will buy, hold or sell investments on your behalf.
There are two main types of funds that you can contribute to - an 'open-ended' fund and a 'closed-ended' fund. These have a couple of differences:
With an open-ended fund, there aren't any restrictions on the number of units or shares that can be issued. So when a new investor comes in, more units are created and are deleted when they sell.
With a closed-ended fund, there is a defined limit to the number of shares it can have. This means a person can only join a fund if a current member sells shares.
With accumulation units, your earned interest is reinvested in the fund; therefore, if the assets start to perform poorly, you may lose money which would have otherwise been paid out via income units. They are also designed to invest in businesses with a high chance of growth, meaning that these funds may be considered riskier.
However, all investments inevitably involve some risk, profit cannot be guaranteed, and all funds’ value can increase or decrease. The inherent risk of any fund depends entirely on what assets the funds invest in.
The type of fund that best suits you will depend on your current financial situation and long-term goals. If you're in a position where it will benefit you to have a regular income stream, then an income fund might be better, as it guarantees a regular income.
This type of fund is often used by, for example, retired people looking to supplement their pension, giving them extra spending money.
If you're in a position where you don't need immediate cash, then an accumulation fund could be more beneficial. By reinvesting your income over a longer time, you'll be able to generate a more significant amount of profit, providing that the value of your fund's investments rises.
When buying shares in a fund for your ISA or SIPP, you don't have to stick with one type of unit throughout the duration of the time that you own them. Instead, you can switch between income and accumulation types so the fund always performs in your best interests.
Investment funds have the potential to be a great source of income, especially as they allow for a broader scope of investment opportunities. When starting to contribute to one, make sure you understand income and accumulation units and use the most appropriate type for your financial goals and needs.
Remember - as long as the fund continues to make a profit, the value of your individual shares in your investment funds will increase too, so you could eventually sell them for a profit.
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.
