Which version of a mutual fund should you buy – “Acc” or “Inc”?

Jason Hollands, managing director of Evelyn Partners, explains how to navigate the maze of fund jargon.

So here’s 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 money.

Now all you have to do is search for this fund. You start typing the name.

But wait a moment, instead of showing you one version of the fund to choose from, you’ll be shown a list of funds with the same name, but each with a different abbreviation, letter or number at the end.

Alphabet Soup: To add to the confusion, there is no consistent approach to fund name abbreviations in the industry – learn what to do as a last resort below

Never underestimate the financial services industry’s ability to deceive the public with jargon and completely confuse people.

What do these strange letters in fund names mean and, most importantly, which one should you choose?

What do common investment abbreviations mean?

The reason there are usually multiple versions of the same fund is because different share classes are created to suit investors with slightly different needs. So let’s take a look.

Acc, Inc or Dis?

Most funds have at least two share classes, ending with either the letters Acc or Inc. These are abbreviations for accumulation or income.

If you choose the income option, all income generated by the fund, such as dividends from stocks or so-called coupon payments from bonds, will be paid out to you and will remain in your account until you do something with it.

Jason Hollands: “Never underestimate the ability of the financial services industry to deceive the public with jargon and completely confuse people.”

Occasionally some funds will have the abbreviation “Dis” (which stands for distribution) instead of “Inc,” but essentially it means the same thing.

If you want to earn a regular income from your investments, perhaps to supplement your pension, then the income or distribution version of the fund could be right for you.

If you don’t need income, choose the accumulation share class instead, if available.

The income generated by the fund is not paid out automatically, but rather flows together within the fund and further increases the capital value of your investment.

It is worth noting that over the long term, after accounting for the effects of inflation, the majority of the UK stock market’s total return comes from reinvestment of dividends.

This is called “compounding” and refers to the effect of the return you earn on previous returns in addition to the original amount invested.

Nobel Prize-winning physicist Albert Einstein called the compound “the most powerful force in the universe.”

Unless you absolutely need to receive income now, reinvesting income is a very sensible move.

I, R or F?

Funds often have random letters or sometimes numbers at the end.

This confusing code denotes versions of the same underlying fund, each aimed at different types of investors, and this usually means different fee levels.

If your fund is marked with an “R” or perhaps “Ret,” it is a retail share class, a version aimed at the public.

But wait, because these are the versions of the fund that charge the highest fees, because most retail investors don’t have the same purchasing power as institutional investors like retail investment managers or pension funds.

The good news, however, is that there’s really no reason to settle for higher-fee retail share classes these days.

Most online investment platforms have access to lower-cost versions aimed at institutional investors, which are marked with, you guessed it, an I or the letters Inst at the end of the fund name, although occasionally the term Prof for “professional” is also used is needed.

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

Don’t worry, this doesn’t mean you’ll get a bad rating – “F” stands for “Fail”! – far from it. This may mean you have access to a founder share class, usually the lowest cost version of a fund anywhere.

As new funds launch and attempt to reach critical mass, asset managers and large investors who were early backers are often rewarded with access to a share class with deeply discounted annual fees.

If your online platform is provided by a group that supported the fledgling fund when it launched, you may also be able to benefit from this reduced version of a fund.

An F appended to a fund name could also stand for “feeder,” which is explained below.

GBP, EUR, USD….

Funds are often launched with different share classes that are valued in different currencies. This allows them to be marketed to potential investors in different countries.

Therefore you will see the currency as GBP, meaning the fund’s share price is in pounds sterling.

USD stands for the US dollar and EUR for the euro. You may also come across other currency abbreviations.

In each case, the underlying fund will be exactly the same and the performance will be the same. So if you are based in the UK, choose the GBP version if faced with such a choice.

Online platforms for UK investors often only provide the Sterling version.

H stands for secured

A relatively small number of funds have share classes designed to eliminate or minimize the impact of exchange rate fluctuations.

These funds may have the letter H or the word “hedged” in their name, followed by letters indicating which currency returns are converted back into, for example GBP for the pound.

These versions of funds should not be confused with “hedge funds” – a type of fund aimed at very high net worth investors that has achieved a certain level of notoriety – nor should they be confused with share classes that are priced solely in a specific currency.

A currency-hedged version of a fund can produce completely different returns than its traditional sibling.

These share classes are actually designed for professional investors who may have a short or medium term view of a particular currency that they would like to consider when investing abroad.

Broadly speaking, an increase in the value of the pound has a negative impact on all foreign investment in foreign currencies and vice versa.

For example, if an investor is very positive about the outlook for the U.S. stock market but is negative about the outlook for the U.S. dollar, a currency-hedged version of a fund that blocks out the impact of a possible rise in the dollar might be worth considering be.

What do cryptic fund and mutual fund names mean?

Alpha, focus, dynamic, optimal… read the “This is Money’s Jargon Busting” guide here.

However, currency movements are difficult to predict and should therefore only be considered by very sophisticated investors who are confident enough to make decisions about current exchange rates and, crucially, decide when it is right to change their currency views.

F for feeder funds

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

This term is often used when investing in funds that focus on assets such as physical property.

The underlying real estate portfolio may be owned by a variety of investors such as insurance funds and pension funds through a master fund, whose name usually contains the letters PAIF.

This stands for Property Authorized Investment Fund, a type of investment fund with certain rules.

Some investors may not wish to invest directly in a PAIF for tax reasons or may not be eligible. Therefore, feeder funds were created to give them the opportunity to invest indirectly by creating a fund that invests in another fund.

While this all sounds confusing and overly technical, the key point is that the performance of a feeder fund accurately reflects the performance of the master fund and therefore it is not worth worrying about.

Open-ended property funds can be problematic, with many forced to halt trading last year. So if you’re thinking about investing in a real estate fund, it’s usually better to look at listed investment companies such as Real Estate Investment Trusts. Luckily there is usually only one share class!

Again, never underestimate the financial industry’s ability to confuse the public

Finally, to add to the confusion, I would like to point out that there is no uniform approach to fund name abbreviations in the industry and therefore different letters and numbers are used by each fund company.

A share class may end with A, C, M, Z, or a number or a hard-to-decipher combination of both, such as U2 or P1.

These almost always mean different fee structures. Therefore, always check what the annual costs are before investing.

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