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Which version of an investment fund should you buy – ‘Acc’ or ‘Inc’?

 Jason Hollands, managing director of DIY investing plaform Bestinvest, explains how you can navigate your way through the fund jargon maze.

So here is the scenario: you’ve read about a successful investment fund, and decided to take the plunge and open an online Isa with a wad of your hard-earned cash.

Now all that is left to do is search for that fund. You begin tapping in the name.

But hang on a minute, instead of being presented with one version of the fund to choose, you are served up with a list of funds with the same name but each of which has a different set of abbreviations, letters or numbers at the end.

Alphabet soup: To add to the confusion, there is not a common approach to fund name abbreviations across the industry – find out what to do in the last resort below

Never underestimate the ability of the financial services industry to bamboozle the public with jargon and leave people utterly confused.

When it comes to fund names, what do these strange letters mean and, most importantly, which one should you choose? 

What do common investing abbreviations mean?

The reason why there are typically multiple versions of the same fund is that a variety of share classes are created to cater for investors with slightly different needs. So, let’s take a look at these. 

Acc, Inc or Dis?

Most funds will have at least two share classes which either carry the letters Acc or Inc at the end. These are abbreviations for accumulation or income.

If you select the income version, any income generated by the fund, such as dividends from shares or payments known as coupons from bonds, will be paid out to you and will sit in your account until you do something with it.

Jason Hollands: 'Never underestimate the ability of the financial services industry to bamboozle the public with jargon and leave people utterly confused'

Jason Hollands: ‘Never underestimate the ability of the financial services industry to bamboozle the public with jargon and leave people utterly confused’

Occasionally some funds may carry the abbreviation Dis – which standards for distribution – instead of Inc but it effectively means the same thing.

If you are looking to receive a regular income from you investments, perhaps to supplement a pension, then the income or distribution version of the fund could be the one for you.

If you don’t need to draw an income, then choose the accumulation share class instead if it is available.

Here, any income generated by the fund won’t be automatically paid out but will instead roll up inside of the fund and grow the capital value of your investment further.

It is worth pointing out that over the long term, most of the total return on the UK stock market, after factoring in the effect of inflation, has come from the reinvestment of dividends.

This is called ‘compounding’ and it is refers to the effect of the returns you will make on previous returns on top of the original sum invested.

Nobel prize winning physicist Albert Einstein referred to compounding as ‘the most powerful force in the universe’.

Unless you really need to draw an income now, reinvesting any income is a very sound move. 

I, R or F?

Funds will often have random letters, or sometimes numbers, tagged to the end.

This baffling code signifies versions of the same underlying fund that are each aimed at different types of investor and this usually means different levels of fees.

If your fund is tagged with an R, or perhaps Ret, it is designated as a retail shares class, a version aimed at members of the public.

But hang on, as these are the versions of the fund which have the highest fees, because most individual investors don’t have the same bulk buying power as institutional investors such as private client investment managers or pension funds.

The ‘eighth wonder of the world’ that could make or break your fortunes 

How to unleash the ‘awesome power’ of compounding… and calculate it. Read more here. 

However, the good news is that there really is no need to put up with higher fee retail share classes these days.

Most online investment platforms have access to lower-cost versions aimed at institutional investors and which are, you’ve guessed it, denoted with an I or the letters Inst at the end of the fund name, though occasionally the term Prof for professional might be used.

If you are really lucky, your broker or online platform might have access to a version of the fund with the letter F at the end.

Don’t worry, this doesn’t mean a poor score – F for fail! – far from it. This might mean you have access to a founder share class, usually the lowest cost version of a fund of all.

When new funds launch and are trying to get critical mass, wealth managers and major investors who were early backers are often rewarded with access to a share class with heavily discounted annual fees.

If your online platform is provided by a group who backed the fledgling fund at launch, you may be able to benefit from this reduced version of a fund too.

But an F tagged onto a fund name might also stand for feeder, which is explained below. 

GBP, EUR, USD….

Funds are often launched with different share classes that are priced in different currencies. That is so that they can be marketed to potential investors in a variety of countries.

You will therefore see the currency displayed with GBP meaning the fund’s share price is in pound sterling.

USD stands for the US dollar and EUR for the euro, and you may come across other currency abbreviations as well.

The underlying fund is exactly the same in each case and the performance will be the same, so if you are based in the UK then select the GBP version if you are confronted with such a choice.

Often online platforms for UK investors will only make the sterling version available. 

H is for hedged

A relatively small number of funds have share classes that seek to eliminate or minimise the impact of currency exchange rate movements.

Should you invest in a ‘hedged’ fund? 

Calling currency moves is notoriously hard, but some investors are tempted to protect themselves. Read more here. 

These funds might carry the letter H or the word hedged in the name, followed by letters denoting what currency returns are being converted back into, such as GBP for the pound.

These versions of funds should neither be confused with ‘hedge funds’ – a type of fund aimed at ultra-high net worth investors that has gained a degree of notoriety – nor should they be confused with shares classes that are simply priced in a particular currency.

A currency hedged version of a fund can have wildly different returns from its conventional sibling.

These share classes are really designed for professional investors who might have a short or medium term view on a particular currency that they want to factor in when investing overseas.

Broadly speaking, when the pound rises in value it has a negative impact on any overseas investments held in for foreign currencies and vice versa.

For example if an investor is very positive about the outlook for the US stock market, but negative on the prospects for the US dollar, a currency hedged version of a fund that strips out the impact of a potential rise in the value of the pound over the dollar could be worth considering.

However, currency movements are difficult to predict and therefore these should only considered by very experienced investors who are confident enough to take decisions on currently exchange rates and – critically – decide when it is right to change their currency views. 

F for feeder funds

Certain funds carry the word feeder in the title. Rest assured this has nothing to do with meals or eating up your hard earned cash!

What do cryptic fund and investment trust names mean? 

 Alpha, focus, dynamic, optimal… read This is Money’s jargon busting guide here. 

 

You will often see this term used when investing in funds exposed to assets like physical property.

The underlying property portfolio might be owned by a variety of investors such as insurance funds and pensions through a master fund that will normally include the letters PAIF in the name.

This stands for property authorised investment fund, a type of unit trust fund with certain rules.

Some investors might not want to invest directly in a PAIF for tax reasons or are ineligible, so feeder funds have been created to enable them to invest indirectly by creating a fund that invests in another fund.

If all this sounds confusing and overly technical, the relevant point is that the performance of a feeder fund will closely mirror the master fund and so this is not something worth fretting about.

Open-ended property funds can be problematic, with many forced to suspend dealing last year, and so if you are thinking of investing in a property fund, it is usually better to look at listed investment companies such as real estate investment trusts instead where, blissfully, there is a usually just one share class!

Again, never underestimate the finance industry’s ability to baffle the public

On a final note, to add to the confusion there is not a common approach to fund name abbreviations across the industry and so different letters and numbers are used at each fund company.

A share class might have A, C, M, Z or a number at the end, or a hard to decipher combination of the two like U2 or P1.

These almost always denote different fees structures, so always check what the annual costs are before investing.

If, after reading all this, you think you are in the wrong version of a fund, contact your investment platform – or financial adviser if you use one – and ask to switch.

If in doubt, ring up the fund company 

Call or email and ask if necessary, but always check you are using the correct website, email address or phone number, writes This is Money.

This is because clone fraud – where scammers pass themselves off as real financial companies to steal your cash – has become absolutely rife in the past year.

The safest way to find the legitimate contact details of firms is via the Financial Conduct Authority’s register of authorised businesses. 

Read more here about clone fraud and how investors can protect themselves. 

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