Equity Income Funds

[Rids64]

I read a lot about the the benefits of 'compounding' by reinvesting dividend payments rather than taking the cash. However I am struggling to get my head round 'accumulation' and 'income' versions of the same fund. HL tells me that acc units benefit because the dividend payment is rolled into the price of the unit, hence acc units increase in value at a greater rate than inc units where the cash is paid out.

However my understanding is that dividends are paid out at a fixed price per unit held, not as a percentage of the value of the fund so in the case of an acc fund increasing in value but the number of units (and hence the divi payment) remaining the same surely I am effectively reducing the yield and not seeing any compounding benefit?

On the other hand if I take the cash from an inc fund and use that to buy additional units I should be increasing both the total value of my holding and the number of units in that fund, maintaining the yield and getting the benefits of compounding.

If, in the longer term, I want to live off the income would it make any difference to my final income whether I use acc or inc variants to build up the fund?

[Rids64]

Using those figures the income fund holder now has more units, so assuming nothing else changes at the end of year 2 if both fund holders decide to now take income from their holding the one with the income fund is an a better position because he has 110 units paying out £11 whereas the acc fund holder only has 100 units paying out £10?

[Rids64]

I appreciate that Oz and I would not withdraw the cash from the wrapper, just use it to purchase more units (and hence increase income potential) rather than allowing existing units to increase in value without increasing the income potential. Or am I just being a bit thick??

[Rids64]

Ozzie Osmond said:

If the Acc unit holder wants income he has to "switch" from Acc units to Inc units. As illustrated above, he would then hold a different number of units and receive income based on that new number. So it would all balance out.

Brilliant, the penny has finally dropped with me - using your example above the acc fund holder would sell his 100 units for £110 and uses that to buy 110 income units thereby generating the same level of income that the income fund holder would get. I can sleep easy now, thanks.