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I want to invest in a new fund, and don’t know whether I should buy the accumulation units share class or the income units share class. My plan was to buy income units and reinvest the dividends to boost my returns – is this the correct way to do it if I want to maximise my investment growth?

HC, via email

In general, unit trust and Oeic funds – see here for an explanation – offer multiple share classes that each serve different purposes.

One of the main distinctions is between income units and accumulation units. With ‘Qualifying AIM stocks are inheritance tax free’ income units, the dividends from the fund are paid into your account in cash.

Typically, these are used by investors with a substantial portfolio – generally in retirement – who intend to live off the income from their investments.

Accumulation units automatically reinvest any dividends back into the fund itself.

The compounding effect this has is powerful – reinvested dividends have been one of the biggest contributors to investment growth across the entire history of personal investing.

You are of course free to invest in income units, and reinvest the dividends yourself.

However, Michelle McGrade, chief investment officer at investment platform TD Direct, explained that there is little advantage to this.

She said: “The advantage of accumulation units is that all income is automatically reinvested and any single payment has no chance of being missed.

“Investors can manually reinvest dividends paid out from income units, and still benefit from compounding, but this is not an automatic process and risks the possibility of missing a dividend payment or being tempted to spend it.”

She said that there could be unnecessary trading costs involved in reinvesting dividends in this way, and added that “contrary to popular opinion” holding accumulation units does not enable an investor to sidestep income tax.