Income funds attempt to consistently pay dividends to fund holders, utilising the money obtained through corporate earnings. Accumulation funds use those corporate dividends to invest in more shares, so investors can profit from capital growth.
Against these potential rewards you need to evaluate a variety of potential costs:
Ongoing charge figure (OCF) – a yearly cost you’ll need to pay however the fund performs.
Performance fees – normally paid by actively-managed funds, these typically take 20 percent of everything above a particular level of performance
Trading fees and stamp duty reserve tax – paid when a fund buys or sells a share
Exit fees – imposed by some funds should you decide to sell your interests
You can find out more about fees and how they effect your investment performance here.
What variables affect stock fund prices?
Companies disclose their financial statements at least once a year, as well as posting trading updates and announcements of dividend payouts for the future.
If the company is functioning well and is projected to do so in the future, this should have a favourable effect on the share price – and thus equity funds that hold the company. Conversely, if the prospects aren’t looking good, the share price can plummet.
The overall economy is also important on equity fund prices. If economic conditions are excellent and investors have faith in companies’ capacity to grow, the demand for shares increases. The more that demand outweighs supply, the higher the share price can go.
Naturally, if the current state of the economy is not favourable, investors might not have as much faith in the future possibilities of a company. As a result, the price of a company’s share may decrease even though the business itself is doing well.
Do I have to pay taxes on the equity funds I own?
Since April 2018, you are exempt from paying taxes on dividend income up to the equivalent of £2,000.
After this point, dividends are subject to taxation at a rate of 7.5 percent if you are a taxpayer who is subject to the basic tax rate, 32.5 percent if you are subject to the higher tax rate, and 38.1 percent if you are subject to the additional tax rate.
If you sell equity funds during the tax year 2021–2022, you could be subject to paying capital gains tax on any profits over £12,300 that you make from the sale of such funds.
Take note that beginning in April 2022, the dividend tax will increase to 8.75 percent for taxpayers subject to the basic rate, 33.75 percent for taxpayers subject to the higher rate, and 39.35 percent for taxpayers subject to the additional rate.
If you hold equities funds in an individual retirement account (Ira), whether it be a stocks and shares Isa, a junior Isa, or a lifetime Isa, you will naturally not be required to pay dividend tax or capital gains tax on them.