How Do Funds Make You Money?
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We know, we know, this is what you really want to know so let’s get down to business. The way money is made depends on the investment. So if you own bonds or make a short-term loan you receive interest. If you own shares you receive dividend payments, aka a slice of the company’s yearly profit. If you own something and it goes up in value - like share or a house for instance - you can make a capital gain.
Need a refresher? Read our investment guide.
So what does a fund pay?
A fund is made up of different investments so it makes money in all these different ways - interest, dividends and capital gains.
Got it. But how do I get paid?
A fund invests in many different things and places. The interest and dividends from these investments are paid out regularly. It's the fund’s duty to pass this income on to you and all the other owners of the fund.
If you own an Income Fund this income is deposited directly into your bank or broker account. If you own an Accumulation Fund, this income is kept in the fund and reinvested.
Which is best?
Well, while it’s nice to receive a little money every now and again, reinvestment does stop you from spending it right away (yawn) since it keeps the money locked up in an investment. But it’s your choice if you want regular income now or prefer to keep it for the future.
What about capital gains?
Similar to investing in individual shares, a fund can go up in value. This may happen if the fund invests in bonds, companies, property or commodities that have been successful and gone up in price. If you sell your units in a fund that has gone up in value, you’ll make a capital gain.
For example, if you bought 1000 units at £1.30 today (a £1,300 investment) and in five years sell them all at £2.30, you will receive £2,300 which is £1,000 profit (high five all around!).