Moving from a Distributive to an Accumulating Investment Fund.
Caveat: The post below is not a financial advise. I am not a certified or trained financial adviser. This is just a log of my own experience with investing.
When I started my investment journey. I did not really understand the difference between a distributed Index fund / ETF and an Accumulatibe Fund / ETF. It turns out, although but eventually yield the exact same returns. One (accumulating) is ideal and better suited for those just starting out their investemnt journey. The order fits better when you are retired and intend to start enjoying the fruit of your investment.
Accumulating investment fund is a fund where dividends acrud to the investors are automatically reinvested back into the fund and thus are not paid to the investor directly.
Distributing investment fund is the opposite of an accumulating investment fund because in this case, dividends is paid out to the investor.
The advantage of an accumulation fund include:
- Cost: Although automatic reinvestment is offered by many stock brokers. Most of them offer this at a premium cost. There is also the cost of reinvesting the dividend especially when you use a broker with transaction fees. Accumulative etf solves all this by automatically reinvesting your dividends back into the funds.
- Tax friendly: The US and many countries do place tax on dividend paid to the investor. Dividend tax can be as high as 30% of the dividend. One way to avoid paying this tax is accumative funds. Since no dividend is paid out to you no tax is applied.
- Perfect for passive investment: Acuumative funds sits perfectly with the concept of passive stress free investment. It removes the hassle of having to worry about what to do with dividends or when to reinvest them back. The fund does this for you automatically allowing you to get on with your life.
The above was why I moved both my Bond and Stock holding from distributive (funds that pay dividends) to accumulative.