What Is the Difference Between Income And Accumulation Funds?

This is a guide on how income and accumulation funds work to assist you in choosing the best investment for your money.

There is actually a pretty straightforward difference between income funds and accumulation funds.  Each does what it states on the tin, with one ‘growing' (accumulation funds) and the other ‘paying' (income funds).

However, identifying what each entails and making use of that knowledge to pick the best unit trust, investment trust, or OEIC is entirely another matter.

How do investment funds work?

While the mechanics and pricing of different types of funds differ significantly, they all work on the same principles:

  1. Investors purchase ‘shares' in a fund
  2. Their money is joined together
  3. The fund makes use of its pooled capital to invest in specific assets
  4. Investors are rewarded based on the overall performance of the fund

The distinction that we are making is limited to point 4: how investors are rewarded.

Even the classic income fund that invests in fixed return assets can be set up for accumulation: it comes down to what the fund does with your profits

So what's the difference between the funds?

Income Funds

Whatever their underlying investments, Income Funds pay any profit to your nominated bank account. This means that you can withdraw the money instantly as an alternative income.

Usually, income funds buy fixed return assets such and securities and bonds. However, you could select a fund that invests purely in equity and still use it as an income fund by choosing to withdraw your profits.

Accumulation Funds

On the other hand, Accumulation funds automatically reinvest your profits to acquire more shares in the fund. This means your stake in the fund increased, and your profit should rise exponentially over time as long as the fund performs well.

Investments should be treated as mid-term to long-term (generally more than five years). However, as most funds will give you the decision to choose between income and accumulation when you first invest, you are able to determine whether the investment is entirely geared to the future, or if you want to benefit from any income now.

Are income or accumulation funds safer?

All investments inevitably involve some risk: profit cannot be guaranteed, and the value of the fund can increase or decrease. Their intrinsic risk is almost equal since the safety of your money essentially depends on what the fund invests in.

  • Securities, corporate bonds, and gilts are usually thought to be the safest options and will usually pay a fixed (however, usually lower) return.
  • Stocks and shares are typically thought to have a greater inherent risk, but even this can be decreased by investing in a spread of ‘safer' businesses and markets.

Both accumulation and income funds restrict your risk by pooling your money with other investors. This raises their purchasing power so the fund can invest in a wider range of assets.

In a sense, income funds are somewhat safer since each withdrawal lessens your exposure. However, withdrawing the account earnings with every round of payments will restrict the growth of your total investment.

Investment Trusts

Investment Trusts are ‘closed-ended', meaning the fund is made up of a limited number of shares whose price is not directly connected with the overall investment of the fund; you can possibly buy underpriced or overpriced shares.

This also has connections to the question of Income vs. Accumulation. With a restricted number of shares available, they may not offer the facility to automatically have your profit reinvested. As such, if you are in it for accumulation, you will need to proactively buy back into the fund.

Should you choose income or accumulation?

If you require a regular income from your investments then an income fund lets you marry short-term benefits of a regular income with some features of a longer-term investment (the own shares or unit price of the fund).

Reinvesting your earnings through an accumulation fund, on the other hand, means that your investment will increase faster and with it, your potential for profit over time, assuming that the fund performs well.

If it performs poorly, even more of your money is invested and subject to risks of the stock market.

When it comes to deciding whether accumulation or income is the better choice for you, weigh up your short-term and longer-term needs.

Alternatively, you could explore other types of investments, such as premium bonds.

After that, you will need to compare investment funds and pick those with underlying investments that match both your attitude to risk and your goals.

Remember: As long as the fund continues to make a profit, the value of your individual shares in Unit Trusts or OEICs will increase too, so you could eventually sell them for a profit.

Investing in Property Abroad: Pros & Cons

Have you had enough of watching the poor weather and the low savings rates available in the United Kingdom? Acquiring a property abroad could not only improve your outlook but your wallet too! In this guide, we examine the pros and cons of investing in property abroad.

Is investing in a property abroad as good as it looks?

Owning a holiday home is a dream for many, and while it can be a source of rental income if you lease it out, there are also many downsides to reflect on before taking the plunge too.

Listed below are a few of the pros and cons with regards to buying a property abroad:

Pros

  • Being able to lease the property for a significantly higher amount compared to standard residential leases
  • Having a holiday destination already booked and ready for use all throughout the year
  • It can be a good investment
  • You get to choose a location you enjoy
  • You will be the envy of your  family and  friends
  • Potential to purchase a low-value property with a high commercial value

Cons

  • If you have a mortgage on your property abroad as well as in the United Kingdom, you will have to manage two significant debts
  • Your rental income may not cover the mortgage payments
  • You will be responsible for all the costs of maintenance
  • The actual cost and return on an overseas property is determined and influenced by fluctuations in the exchange rate
  • You will need a management company or understanding friends to deal with the property for you
  • You will feel obliged to enjoy the holiday in the same place every year
  • In most cases, you would have to choose between a ‘ski' lease and a ‘summer' lease

How easy is it to buy abroad?

Investing in a property overseas may simply be a way to earn money, rather than a reason to travel abroad throughout the year. Whatever your reason for desiring to buy outside of the United Kingdom, you should prepare yourself for a different type of property market.

Are Premium Bonds a Safe Investment or a Waste of Time?

Premium Bonds allow you to save your money with the odds of winning cash prizes from monthly draws. However, are they as straightforward as they appear? Here is a guide on how they work.

What Are Premium Bonds?

Premium bonds are a savings scheme presented by NS&I (National Savings and Investments) that allows you to pay in any amount from a minimum of £100 (£50 for existing bond holders) up to a maximum £50,000.

Every £1 you invest into a bond is assigned a special number which is then entered into a monthly prize draw. If your special number is chosen, you could win a tax-free prize ranging from £25 to £1 million. You would not earn interest on any money that you save into Premium Bonds.

Any return on your investment is not guaranteed, and the returns are on usually much lower than the interest that you could earn from a normal savings account.

The unique number of your bond is re-entered into each subsequent draw until you choose to cash them in.

How Does The Prize Draw Work?

ERNIE  or the Electronic Random Number Indicator Equipment pick out winning numbers from all of the bonds entered every month.

You have a 30,000 to 1 possibility of winning for each £1 you put in.

The prize draw is split into three bands:

  • Higher value (5% of prize fund): £5,000, £10,000, £25,000, £50,000, £100,000 and £1 million
  • Medium value (5% of prize fund): £500 and £1,000
  • Lower value (90% of prize fund): £25, £50 and £100

What Are The Benefits?

  • Tax free savings.
  • There is no risk to your money as it is left untouched; the prize draw is made up of the interest that would have been paid out to everyone in the prize fund.
  • They guarantee that all of your money is completely safe because NS&I is backed by HM Treasury.
  • There is no minimum length of time that you must hold the bonds, meaning you can cash them in any time.

What are the drawbacks?

  • You do not earn any interest.
  • You may never win anything from the prize draw.
  • Even though you can withdraw your money anytime, it can take up to 8 days to get the money into your account.

How can you purchase Premium Bonds?

You can purchase them directly from NS&I online, by post, or over the phone.

You must be at least 16 years old to buy a premium bond, but parents or grandparents are allowed to buy them for anyone under 16.

How do you receive your winnings?

You can select one of these three methods of payment:

  • Paid by post: this is the default way that you will be paid. This will be in the form of a warrant, which is similar to a cheque, that you will take to your bank and wait to clear.
  • Reinvest into more bonds: you can choose this up to the maximum holding of £50,000.
  • Paid to your bank account: you must register and login to the website of NS&I's to determine the account you want your winnings to get transferred to.

What are the alternatives?

Even though there is a probability that you could win big with Premium Bonds, the chances of hitting the jackpot are negligible at best.

To ensure that your money is growing you could invest in a savings account instead.

What is Binary Options Trading?

You could earn a quick profit by trading in binary options. However, you could also lose your money just as fast. Here is a guide on how it works.

What is it?

Rather than investing, Binary Options Trading is a type of gambling, where you trade on an asset increasing or decreasing in value within a set time.

How it works

When you perform a trade in binary options, you decide how long the trade will last. Then if you are right, you are told what your possible return will be.

This implies that you earn a fixed amount if your trade wins, unlike investments.

There are three possible outcomes:

  • If the asset's value is the same, you get your money back
  • If you are right, you earn a profit
  • If you are wrong, you lose the money that you traded

Some companies give potential returns that would double your money. But the greater the potential return is, the riskier the trade.

What you can trade on

You can trade binary options on several assets, including:

  • Currencies (forex): Currencies are always traded in pairs, e.g. USD/AUD
  • Indices: e.g. DAX30 (Germany), the FTSE 100 (UK), and S&P 500 (US)
  • Commodities: e.g. energy and metals
  • Stocks: This is the value of the shares of  company

Pick a type of trade

There are various ways to trade binary options, and how you make money from them differs:

  • Range: You bet on whether or not a market price will close within a set range. If at the end of the time you are right, you make a profit.
  • High/low: You bet on whether the market price at expiry will be higher or lower than the market price you started with.
  • No touch: This is the opposite of one touch. You bet on the price not reaching the target within the time.
  • One touch: You get a target price, which can be higher or lower than the starting price. You bet on the price reaching the target within the time.
  • Ladder: You make several bets at once, with different expiry times. This means you could get partial payouts if some of the bets go in your favour.
  • Pairs: You bet on the price of two assets, e.g. gold against silver. If you think gold will outperform silver, you bet up. If you expect silver to perform better, you bet down.

Depending on the company, you could decide to trade in binary options that last just for 60 seconds, or as long as several months.

Is it regulated?

All UK-based binary options companies are regulated by the UK Gambling Commission, instead of a financial regulator.

This is because trading in binary options is a manner of gambling, instead of an investment.

Binary option companies that are located overseas do not require a Gambling Commission Licence to trade, so you should try and avoid them if possible.

See also: How to Trade in Binary Options

What is CFD trading?

You can trade in CFDs across various global financial markets. However, understanding the risks can help you to avoid big money losses. Here is a guide on how CFDs work and how to begin trading.

What is it?

A Contract for Difference (CFD) is a leveraged investment which means that you do not need to commit all your money on a single trade.

Also known as trading on margin, you only need to place a percentage of the trade to open your position, which is normally between 0.1% and 1%.

This offers you the flexibility to spread your investments over numerous trades in various markets, such as:

  • Foreign exchange
  • Shares in companies
  • Indices, such as the FTSE 100
  • Commodities, such as gold and silver

How does it work?

When you make a trade you receive two prices, the buy price, and the selling price:

If you think a value will increase, you could go long and buy some CFDs
If you think a value will  decrease, you could go short and sell some CFDs
The difference between the prices of the two is known as the spread. To earn profit, you must close your position after the price has moved more than the value of the spread.

For example, if the purchase price for the FTSE 100 is 6801 and the selling price is 6800, the cost would need to grow by more than 1 point* to make you a profit.

How does the spread work?

When selecting a CFD trading platform, the main thing to look out for is the spread's size.

The smaller the spread of the CFD, the smaller the market movement demands to be to be able to give you a profit, for example:

  • Platform A has a sell/buy price worth 6800/6801 (one point spread) on the FTSE 100. The market would need to increase by two points to give you a profit.
  • Platform B has a sell/buy price worth 6798/6801 (three-point spread) on the FTSE 100. The market would need to increase by four points to give you a profit.

What is the margin?

It is the amount you need to place to open your CFD trade. It is different between various CFD companies.

For example, if the margin for a trade is 1%, and you want to purchase 100 FTSE 100 contracts with a sell/buy price of 6800/6801, you will need a deposit of £68.01 (1% of 6801).

The margin serves as a deposit which satisfies some of your losses if the trade works against you.

Your losses could still surpass your deposit, so make sure you understand the risks involved before you begin trading.

How can you earn a profit?

When you perform a CFD trade, you buy a number of contracts. If the market moves in the direction that you predict, you could earn a profit.

Below is an example of how a CFD trade could make or lose your money:

The sell/buy price for the FTSE 100 is 6800/6801, meaning each contract at the selling price is worth £6,800, or £6,801 for the buy price, you purchase five CFDs, the cost of the trade would be worth £34,005 (5 CFDs x £6801)
You only need to put down a 1% margin to open your trade, worth £340.05 (1% of £34,005)

To earn a profit, the selling price needs to be more than the buy price that you bought your CFD:

You sell your five CFDs when the sell/buy price is 6806/6807
Multiply the selling price by a number of CFDs to give you £34,030 (5 x £6806)
Deduct this amount from your original contract value, £34,030 minus £34,005, and you have a profit of £25

If the selling price is below the amount that you bought your CFDs at, you will make a loss, for example:

You sell your five CFDs when the sell/buy price is 6796/6797
Multiply the selling price by a number of CFDs to give you £33,980 (5 x £6796)
Subtract this amount from your original contract value, £33,980 minus £34,005, and you have a loss of £25

What are the fees to be applied?

Here are some other charges you may find when trading CFDs:

  • Overnight trade interest charge: CFD companies set an interest charge of around 1.5% for any trades you leave open overnight.
  • Inactivity fee: If you have not yet traded for a set term, such as two years, you could face a monthly charge of around £12 until you close your account or start trading again.
  • Funding/withdrawal fee: Companies charge you to withdraw or add money to your account, such as a set fee of £5 for every £200.

Do you have to pay tax?

You do not need to pay income tax or stamp duty when you invest in CFD trading.

In a single tax year, if your profits exceed £11,300  (6th April until the following 5th April) you have to pay Capital Gains Tax.

However, you can opt to offset any Capital Gains Tax with any losses that you make when CFD trading.

What to do next

Listed below are some top tips to follow before trading in CFDs:

  • Do not make trades until you have taken the time to study the market, and make sure that you only trade the amount of money you can afford to lose.
  • Open and make use of a demo account to familiarise yourself with your chosen platform
  • Do not perform an emotional trade, like if you want to make up from any big losses
  • Only make trades on markets you understand

See also : How to Execute a CFD Trade

How to Execute a CFD Trade

Here is a guide what to expect when setting up a CFD account and the things you can do to effectively manage your CFD trades.

Register an account

Select a CFD (contract for difference) trading broker, then register for an account before you start trading. The details you need to provide includes:

NameEmail Address
AddressDate of Birth
Telephone/mobile numberIdentification, e.g. passport number

You may also be required to answer the following questions:

  • How much experience do you have in trading?
  • How much knowledge do you have regarding trading?
  • How often do you trade?

Just indicate zero or none for each question if you have never traded before.

Add money to invest

Before you can open a position, or make a trade, you need to add cash to your CFD account.

Every trade uses only a small percentage of your funds when you open a position.

All CFD trades demand you to put down a deposit, also known as the margin, to help satisfy any losses on your trade.

Choose where to trade

You can trade CFDs in various markets, including:

  • Equities: e.g., Barclays, Tesco, Vodafone, and BT Group
  • Indices: e.g., Wall Street. US Tech 100, and FTSE 100
  • Commodities: e.g., silver, gold, gas, oil, wheat, sugar, and oats
  • Foreign Exchange (FX): e.g., US dollar/Canadian dollar and euro/Japanese yen

How can you choose?

Many CFD platforms provide you the option of checking the previous performance of a market before you place your bid. However, You can also look at:

  • News: Updates on economic impacts that could have an effect on your trade from news feeds worldwide.
  • Performance charts: Displays how a market has performed, from the last year based on daily readings, for example, (although this does not guarantee future success).
  • Market Information: Explains how much you can trade and other information, including the cost of any commission charges.

Make a trade

To make a trade, decide whether to go short or long on a position and the amount you want to trade.

The margin depends on the trade. You normally need a greater margin for riskier investments.

CFD trades which have a greater margin could cause you to lose a huge percentage of your money, but also have the potential to earn you a large profit.

CFD trading tools

Instead of constantly watching your trades, you can make use of CFD trading tools to help you manage your trades, for example:

  • Limit order: Once your trade approaches a certain value that displays the amount of profit that you are happy to take, this closes your position.
  • Stop loss: To dodge a huge loss, determine a value for your position to close, so your losses are only as much as you are prepared to lose.

Here is an example of how a stop loss works:

You open a trade worth 6801 on the FTSE 100,
You think the value will increase, so you go long (buy)
In case the market goes against you, you choose a stop loss at 6791
If the value decreases sharply to 6780, your position still closes at 6791, limiting your losses

Here is an example of how a limit order works:

You open a trade worth 6801 on the FTSE 100,
You think the value will increase, so you go long (buy) and pick a limit order at 6806
If the value increases to 6806, your position will close and you will earn a profit

Check your trade

Every CFD platform gives you tools to assist you in managing your CFD trades, meaning that you do not need to keep watching the performance of your trades.

To avoid big losses, make sensible trades, for example, avoid investing more because you are losing money on another trade.

Your CFD platform allows you see all of your open trades, giving you easy access to them while they remain active.

Close your trade

You can close a trade anytime, even if you have set a limit order or stop loss on it.

Once you are ready, go to where your platform enumerates your active trades then click on them to choose to close them.

You are responsible for any trades you perform, so you must understand the market you invest in if you want to increase your chances of earning a profit.

See also: What is CFD Trading

Should You Invest in a Unit Trust?

Unit trusts allow you to invest your money alongside other investors. It offers the chance of making big profits, but are they worth the risk? Here is a guide on how they can work for you as easily as they could work against you.

Pros and cons of investing in unit trusts

You should seek advice before making any decision on any stock market linked investment, but here are some unit trust related pros and cons to think about before taking that step:

ProsCons
Can invest in multiple securities with different risk factorsOffer price needs to exceed bid price before a profit can be made
Managed by a professional fund managerOverwhelming choice of unit trusts
Can invest in multiple securities with various risk factorsCharges can be expensive
Accepts smaller deposits compared to alternative investment productsCharges can be expensive

How do you monitor your unit trust?

You can observe your investment by contacting your financial advisor or fund manager.

Alternatively, you should be able to access the website of your chosen fund management company to check the performance of your investment at any time you want.

The performance information will reveal the value of the buy and sell price of an individual unit in the unit trust. If the selling price is higher than your original buy price, then you are earning a profit.

Can you use your ISA allowance with a unit trust?

Yes, you can invest in a unit trust by using your ISA allowance. This will make your investment tax-free.

This means that your investment amount is limited to your ISA allowance every tax year – currently £20,000.

Invest by communicating with the unit trust fund management company, an independent financial advisor, or a broker.

What are the risks of a unit trust?

As each unit trust invests in several companies tied to the stock market, you could end up losing cash as a result of a downward turn.

Your fund manager will monitor your unit trust's performance to try and avoid any blips in the stock market, hence keeping your investment as profitable as possible.

Is a unit trust right for you?

To find out if a unit trust is the right type of investment for you, ask for guidance or advice from a financial adviser before making any decisions.

How do you close a unit trust?

You can talk to the fund manager directly and discuss the withdrawal of your investment.

You may have to pay an exit fee before you get your money back, Depending on the fund management company. This fee can cost you as much as 5% of your overall investment.

You will also lose money on your investment if the unit sale price is lower than when you made your investment. Make sure you arrange your withdrawal at a profitable time or risk losing money.

How to Start Forex Trading

You can perform a forex trade 24 hours a day and five days a week. However, choosing the right account could help you get closer to earning a profit. Here is a guide on how to get started with forex trading.

What is forex trading?

Forex trading is a high-risk investment, and you could lose more amount than your deposit.

Look for a broker

You need to have a forex account with a broker as they will give you a platform that you could use to trade on.

Here is an example of two brokers and their bid and ask exchange rates for the EUR/USD:

BrokerBid exchange rateAsk exchange rateSpread
A1.12310 1.123211 pip
B1.12310 1.123312 pips

Going for the broker with the lowest spread implies that the exchange rate must only make a smaller movement before you can earn a profit, for example:

  • To earn a profit with broker A, the exchange rate must move by 1.1 pip or more in your favour.
  • To earn a profit with broker B, the exchange rate must move by 2.1 pips or more in your favour.

Forex trading chargers

Even though most forex brokers combine the costs in the spread that they give you, some could charge you for the following:

  • Inactivity fee: When you stop trading for a period, such as one or two years, your broker could charge you until you begin using your account again, for example, £12 per month.
  • Adding/withdrawing charge: Brokers charge if you add money to your account or withdraw from your account. This is ordinarily a set fee, such as £5 for every £200.
  • Overnight trading:  For leaving a trade overnight, some forex brokers charge you for interest. For example, 1.5% of the price of any open trades.

Open an account

After you pick a forex broker, you must complete an online registration form with them.

You will need to provide them with the following information:

  • Full Name
  • Address
  • Email Address
  • Mobile Phone Number

Your broker will then send a link via text message or email to validate your details.

You may also have to confirm your account by giving your driving licence or passport number. The name on your forex account must match the name on your ID.

If your selected broker owns demo account, make use of it to so that you can be familiar with their forex trading system before you begin using your own money.

Make a trade

You can trade in forex Monday to Friday, 24 hours a day, which means you can trade on currency pairs more frequently compared to other markets, such as commodities or indices.

Performing a trade is also called opening a position, and if you earn a profit or loss is based on the performance of the base currency as compared to the counter currency that you trade with.

The first currency is the base currency in one pair, the counter currency, on the other hand, is the second, for example, EUR/USD has a euro base currency, and a US dollar counter currency.

The exchange rate is the amount of the counter currency that you can purchase with the base currency. As an example, if the EUR/USD had an exchange rate of 1.12 you can earn $1.12 for every euro.

If the rate increases to 1.13 ($1.13 for one euro), this means that the euro's value has increased against the US dollar as you can receive more of the counter currency for the base currency.

Forex trading tools

If you would want to manage your trades without watching them regularly, there are a few trading tools you could make use of:

  • Limit order: You pick the exchange rate your trade closes at. This allows you take a profit when the rate reaches a level you have set.
  • Stop loss: You pick the exchange rate your trade closes at. However, this does not guarantee further losses as brokers cannot always close the trade at an exact rate.
  • Guaranteed stop loss: You pay a fee to the broker, and they will close your trade at the same exchange rate you choose.
  • YBuy limit: Your broker will open a trade when the exchange rate reaches your chosen value. If the rate is not reached, the broker never actions your trade.
  • Margin call: If your losses come near your margin, your broker will ask you to add more money. If you do not, your broker will then close your trades to stop further losses.

Close your trade

Before you close your trade, also known as closing your position, you can review if you are earning a profit or a loss by studying the active trades on the platform of your chosen broker.

If you are ready, choose the trade you want to close from your active trades tab and click on the close trade button.

You are then required to verify if you want to close your trade. Then you are shown how much profit or loss you have earned.

How to Trade in Binary Options

Before you commence trading in binary options, you need to look for an account and work out how to perform a trade. Here is a guide on how to begin making trades in binary options.

Pros and cons of binary options

ProsCons
Easy to set upIt is gambling
High potential returnLosses can exceed any profits
You could make a profit fastYou could lose money fast

Binary options companies would not charge you for performing a trade or charge a commission for making use of their platforms. Instead, they earn profit from the losses you make on trades.

Choose an account

Before you trade in binary options, you should open an account. To pick the right account, consider:

  1. The potential payout
  2. The amount of what you want to trade at one time
  3. The amount you need to deposit to open the account

Open the account

When you discover an account, visit the website of the company and register with them. You will need to provide:

  1. Your personal details
  2. Your contact details
  3. Your bank details

A lot of companies will ask you to provide an initial deposit before you can begin trading in binary options, such as £100.

Perform a trade

To trade in binary options, you are required to  select:

  1. An asset to trade: For example, gold or shares in a company
  2. A time limit: This is the time when your trade will end
  3. An amount to trade: Any profit you make will be a percentage of this

 

You then get to pick from two options:

  • Call: If you expect the market to increase
  • Put: If you expect the market to decrease

You are then going to be offered a possible return based on your trade, for example, 180%. If you are correct, you earn an 80% profit, if you are wrong, you lose the money that you traded.

You could opt to sell or cancel your trade before the time expires for a partial payout. However, not all companies offer this feature.

Examples of Binary option trade

When the rate is 1.29, you want to trade on the currency pair EUR/GBP

  • The potential payout is 78%
  • You trade £100
  • You picked a duration of one hour

Here are some possible outcomes after an hour, if you were to call and put based on the binary option trade above:

Call option

Rate at the end of tradePayoutProfit/Loss
1.20£0-100%
1.28£0-100%
1.29£1000%
1.30£17878%
1.40£17878%

Put option

Rate at the end of tradePayoutProfit/Loss
1.20£178100%
1.28£178100%
1.29£1000%
1.30£0-78%
1.40£0-78%