Accumulation vs Distributing Funds

When investing in funds, you're sometimes given the choice between accumulation and distributing.

With an accumulation fund, any dividends and bond payments are immediately reinvested in acquiring more shares and bonds. This is a good option when you're trying to build the overall value of your portfolio.

With distributing funds, any income generated by the fund's assets are paid to the investor. In a stocks and shares ISA, this will appear as cash in your account balance. This is useful if you want to live off your investments without having to sell them.

If you have a distributing funds, and you don't need the cash, you can reinvest it as you see fit. Rather than it automatically being reinvested into the same fund, you can put that money to work elsewhere. For example, you might use the payments from a stocks fund to purchase more of a bonds fund when the price of bonds is low, and vice versa. This makes sense for a reasonably active investor. For people who want to be as hands off as possible, then an accumulation fund is the way to go.