Accumulation Unit - Explained
What is an Accumulation Unit?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is an Accumulation Unit?
An accumulation unit can be defined as a type of investment trust designed to increase the value of a fund over a period of time. The fund experiences growth in the sense that the income generated from the fund are reinvested over an accumulation period. An accumulation unit is not designed to offer an investor a steady income, rather, or offers growth or increase in fund which is accumulated over a period of time. The dividend income received by an investor is reinvested so that the value of the fund unit can build up. An accumulation unit could be a mutual fund or investment trust.
How Does an Accumulation Unit Work?
An accumulation unit can mean any of the following; An accumulation unit is a type of investment trust that offers growth instead of regular income to investors by reinvesting the dividend received on an investment. In unit trust, income of the trust is not paid to investors, rather, it is reinvested into the trust. In a case or variable annuity, an accumulation unit can be described as the gauge of the value that an individual invests in an annuity plan or account over a specific period of time, usually the accumulation phase. Through the calculation of accumulation units, the accurate value contributed by an annuitant is realized.
Accumulation Unit and Income Unit
Income units are different from accumulation units, the major difference is that while an income unit offers dividends, interests and income to an investor, an accumulation unit increase the value of the fund by reinvesting its dividend and income. In essence, while income units are designed to create a regular stream of income for an investor, accumulation units are designed to increase the value of funds invested. Both income units and accumulation units serve unique purposes, it is the duty of an investor to decipher which of the units is best based on the goals of the investor. Investors who opt for income units have the present in mind while those that choose accumulation units do so for future gains. A financial advisor can give professional advice to investors on which unit is suitable and for what purpose.