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Types Of Funds: Distribution Funds

The offer of investment funds is huge and that is why it is convenient to be clear about which one suits you according to your investor profile. There are different types of funds depending on the geographical area or the assets in which they invest the management model (active or passive) and even how they seek to return the profits to the saver. That’s where the distribution funds appear in front of the accumulation funds.

How a distribution fund works

The best way to understand what a distribution fund is is to confront it with the accumulation funds, the most ‘traditional’. Usually a fund invests in companies and fixed-income assets and uses the profit it obtains to continue investing and thus take advantage of the power of compound interest. As a saver you will not receive a penny of the money invested until you proceed to the reimbursement of the fund (and that if you do not decide to reinvest in another fund, the most usual to enjoy tax advantages.

Types Of Funds: Distribution FundsOn the contrary , the distribution funds do reward the saver during the journey . They do so through the dividends distributed by the companies in which they invest. Instead of reinvesting that money, they offer it as payment to the fund participant.

The lack of payment will depend on each fund. There are those who make monthly payments with the dividends they have collected, while others prefer to group them in quarterly or half-yearly remittances. What does not change is that you will receive money for the dividends generated by the fund’s investments.

Types Of Funds: Distribution FundsThere is an even more aggressive variant in the remuneration of the participant. It is about the funds of distribution of rents , where the fund assures you the collection of an amount. Normally that figure will be reached through the dividends it receives, but in case the money obtained is not enough, the fund would sell assets to reach the amount.

Advantages and disadvantages of pay-as-you-go funds

The biggest advantage of the distribution fund is that you make sure you recover a part of your investment. In case of a fall, you have already perceived part of the investment. In other words, you reduce the risks in the face of an adverse market situation.

Types Of Funds: Distribution FundsObviously, this security has a price. In this case, you will stop enjoying the advantage of the tax deferral of investment funds. One of the strengths of the funds is that you do not have to pay taxes to recover the money if it is reinvented in another fund. Thanks to this feature they can take better advantage of the compound interest and avoid having to pay as little as 19% of the benefits you get when making the rent.

The long-term difference is huge. In 10 only 10 years, for an initial contribution of 10,000 euros with deposits you will have almost 1,850 euros less interest.

When withdrawing the money via dividend you will have to pay taxes for that capita l. The last tax reform eliminated the exemption on the first 1,500 euros of dividends, so you will have to pay the full amount you charge .

The percentage of taxes will depend on the total obtained by your investments, as shown in the following table.

Types Of Funds: Distribution FundsDifference taxation pension plans and investment funds

In the case of income sharing funds, the disadvantage may be more pressing. And is that if you do not reach the income through dividends will be directly a divestment and reimbursement of shares to reach the figure.

Who can be interested in the delivery funds?

The pay-as-you-go funds are designed for a conservative saver who needs to be sure that he will recover the investment little by little. In the same way, they can also be useful for those who seek to collect a periodic income, such as a retiree who wants to complete the public pension while seeing their savings continue to grow.

In the last year the profitability of the best products of this type is around 8% according to Morning star data.

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