An accumulation unit is a type of measurement used in pooled investment funds, such as unit trusts or mutual funds, to represent an investor’s share in the earnings and reinvestment of dividends and other income. Instead of distributing profits to investors, these earnings are reinvested to purchase more units of the fund, thereby increasing the value of each investor’s holdings in terms of accumulation units.
In Simple Terms, accumulation unit is like reinvesting the money you earn from a lemonade stand back into buying more lemons and sugar to make even more lemonade. In investment funds, instead of getting your earnings (like dividends from shares) in cash, they’re used to buy you more shares in the fund. Over time, this can help your investment grow faster because you’re continually earning on a larger number of shares.
Accumulation units are primarily used in the context of investment economics, specifically within mutual funds, unit trusts, and other types of collective investment schemes. They are a critical concept for investors who are focusing on capital growth over income, as they allow for the compounding of investments over time, enhancing long-term returns.
For example, an investor owns shares in a mutual fund. Instead of receiving dividend payments directly, those dividends buy more shares (or units) of the mutual fund, which are called accumulation units. Similarly, in a retirement savings plan where immediate income is not a necessity, opting for accumulation units can be a strategy to increase the value of the investment over time.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy
