Accumulating funds - unleash the compound interest effect
What are accumulating funds? - The definition
A accumulating fund is a form of investment that does not distribute income such as dividends and interest to investors, but automatically reinvests it in the fund. The term “collection” comes from the Greek word “thesauros,” which means something like “treasure” or “treasure house.” Reinvesting this income increases the value of each fund share. This approach creates a Compound interest effect, as the reinvested income itself generates income again, which can lead to accelerated wealth accumulation in the long term.
Differences between reinvestment and payout
A accumulating fund differs from a distributing fund in that the value of the individual share increases as a result of reinvestment, but not the number of fund shares. In the case of a distributing fund, on the other hand, investors receive the income as cash and can manually reinvest it in the fund, which increases the number of shares. An accumulating fund often bears the identifier “ACC” (for “accumulating”), while distributing variants often include “DIS” are marked (for “distributing”).
Example of accumulating funds:
Imagine that the share of an accumulating fund is worth 50 CHF. In one year, the fund generates 5 CHF per share. This income is reinvested in the fund, bringing the share value to 55 CHF.
Example of distributing funds:
If the same fund were distributing, the return of 5 CHF would be credited directly to you. The share value remains unchanged at 50 CHF and you can either use the payout or reinvest it.
The compound interest effect
The following figure shows the compound interest effect graphically. Because this effect is self-reinforcing, it is known as exponential growth. Whenever possible, you should reinvest the income in order to benefit from the compound interest effect.
Advantages and disadvantages of accumulating funds
benefits
- Asset growth and compound interest effect: As income is reinvested, capital increases faster than when income is paid out.
- Cost savings: Accumulating funds often avoid fees such as spending premiums and stock exchange charges.
- Increasing value for investors and companies: In the case of companies, the accumulation increases the capital structure and improves the image, as the company appears financially stronger.
drawbacks
- No access to income: Investors do not receive any distributions and cannot use the income for other investments.
- No direct cash value access: While assets increase in the long term, they remain tied up until the fund shares are sold.
.png)