The profits made by an investment fund (interest income, dividends, capital gains realized on the sale of assets …) belong to the shareholders of the fund. There are two different ways to enable shareholders to benefit from these profits:
The first way is simply to distribute the profits (usually once a year) to the shareholders in the form of dividends. Funds that proceed in this way are distribution funds, and the shares you get when you invest in such a fund are distribution shares. This type of fund is suitable for investors who want to have a regular income. Depending on the tax legislation applying to the investor, these dividends might be subject to capital yield or income tax.
The alternative is to leave the profits in the fund and to reinvest them continuously according to the fund’s investment policy. Funds that reinvest their profits are accumulative or capitalization funds, they offer capitalization shares. By reinvesting the income generated, the value of the fund’s shares goes up. The investor thus gets no regular income, but he will realize a capital gain when selling his shares. Depending on the tax legislation applying to the investor, this may give rise to capital gains tax or the profit may be tax exempt if the investor has held the units or shares for a certain minimum period. Accumulation funds are suitable for investors who want to build a long-term capital.
Many funds offer investors the choice between both capitalization and distribution shares.