Accumulation Funds

Meaning of Accumulation Funds

Reinvestment refers to the direct reinvestment of the income of an investment fund. This applies to classic funds as well as to ETFs.

  • Accumulating funds are worthwhile with long-term savings plans.
  • ETFs are also available in a reinvestment variant.
  • The bank’s income statement provides information on the amount of taxable reinvested income for foreign funds.

What is accumulation?

The term “accumulation” means the direct reinvestment of the annual income of a mutual fund . The fund companies differentiate between funds that distribute the income on a key date in the year, i.e. pay them out to the investor, and funds that reinvest the income directly in fund units. Of course, an investor can reinvest the amount paid out in fund units, but then has to pay a reduced front-end load. These costs do not apply to an accumulation fund.

Accumulation funds and ETFs

The direct reinvestment of the distribution of a fund is not only possible with traditional, actively managed funds. In the case of ETFs , the more cost-effective variant, the issuers also offer reinvestment solutions.

Retaining earnings is particularly worthwhile for long-term savings goals. It corresponds to the compound interest effect on overnight money or savings accounts . Through the direct reinvestment of the income, the fund assets of the investor increase continuously and not only by the price increases. A classic form of income retention can be found in unit-linked life and annuity insurance .

Accumulation and tax

In the past, accumulating funds meant that the German tax authorities automatically accused the owners of such units of tax evasion. Since there was no distribution, the bank did not automatically adjust the income for the final withholding tax . If a shareholder sold his shares, a withholding tax was automatically payable on the entire profit. Anyone who honestly taxed their retained distributions as part of their tax return every year was well advised to keep their tax return and tax assessment so that they could prove at the time of sale that the tax had already been paid. The Investment Tax Act 2018 has improved this.

In connection with foreign funds, the term “distribution-equivalent income” appears again and again. These are reinvested distributions, which, however, are treated the same as an actual distribution abroad. According to abbreviationfinder,¬†FAF stands for Foreign Accumulation Fund.

Example of accumulation

Assume that an investor holds 50 units of an investment fund for 5,000 euros at a value of 100 euros per unit. On the day of the distribution, the fund pays two euros. The price of the fund fell by two euros on this day, as the accrued dividends are taken from the fund. In the course of the reinvestment, the fund company immediately reinvested a dividend of EUR 100 for the customer at the rate of EUR 98. This means that the investor receives 1.02 new shares in his or her portfolio.

This is how the income of foreign accumulating funds is determined

Foreign fund companies not only focus on the big US investment houses such as Black Rock or Fidelity and Pionier. Ireland and Luxembourg are also important banking centers for German providers in order to be able to set up funds under foreign law.

However, investors do not have to shy away if they find that the fund of their choice does not have a “DE” in the code and that it is a foreign fund. The custodian bank prepares the income statement for the tax office once a year. It lists all taxable profits in detail, ideally with a note indicating the field in the tax return in which they must be declared. The saver must state the income from foreign funds in the “AUS” annex to the tax return.

If you want to know in advance how high the reinvested distribution of your foreign fund was, you can read this in the fund profile. If there was no taxation of retained earnings in foreign funds during the holding period of the units, the tax office will do this when the units are sold.

Accumulation Funds