You will be able to explain what happens to dividends inside an accumulating and a distributing fund.
Farhan has picked his fund from the comparison sheet in lesson 3.5, Build an ETF comparison sheet, and opens his broker's app to buy it. Two lines appear with almost the same name. One ends in "Acc" and costs about S$140 a unit, the other ends in "Dist" and costs about S$110, both made-up prices. The manager, the index and the TER are identical, so he wonders whether the cheaper one is the better deal.
Neither is cheaper. The difference in price comes from what each one does with the dividends, and that is the choice this module is about.
The companies in an index pay dividends through the year. The fund collects them, net of any tax withheld at source, and has to do something with that cash. Fund managers often offer the same fund in two versions, called share classes, that handle the cash differently. Everything else about the two classes, the holdings, the index and usually the TER, is the same.
A distributing class pays the dividends out to its unit holders. Most do it quarterly or half-yearly; the factsheet or prospectus states the schedule. The cash lands in your brokerage account, or the bank account linked to it, and what happens next is up to you.
An accumulating class keeps the dividends inside the fund and reinvests them in more of the index's shares, with no cash coming to you. Each unit you own then holds a slightly bigger slice of the fund's shares than before, and the unit price rises by the reinvested amount over time.
When a distributing fund pays out, the cash leaves the fund, so the unit price drops by roughly the amount paid on the date the payment is set aside, called the ex-dividend date. Made-up example: a unit worth S$100.00 pays a dividend of S$0.50 per unit. After the ex-dividend date, the unit is worth about S$99.50, and you have S$0.50 of cash coming for each unit. You are no richer and no poorer, because part of your money has simply moved from the fund into your account.
The accumulating class never makes that step down. The S$0.50 stays inside and buys more shares. Over the years, this is why two classes of the same fund drift apart in price, as in Farhan's app. The accumulating unit has been quietly absorbing every dividend since the class was launched, so it costs more per unit, and you simply get fewer units for the same money. The unit price on its own tells you nothing about value.
A common belief is that accumulating funds avoid tax on dividends. They do not avoid the tax that matters most here. Withholding tax, from lesson 3.3, Domicile and withholding tax on dividends, is taken when a company pays the dividend to the fund. By the time the fund decides whether to pass the cash on or reinvest it, that tax has already been deducted.
So an Ireland-domiciled fund pays its fund-level tax on US dividends whichever class you hold, and a US-domiciled fund takes 30% from distributions paid to non-US holders. Choosing accumulating over distributing in the same fund does not change the withholding at source. What it can change is tax in your own country, and lesson 4.2 deals with that for a Singapore investor.
Put the two together and compare what you end up with. Made-up example: you put S$100 into each class. Over a year, the index's share prices rise 6% and its companies pay dividends of 2%, of which 15% is withheld at the fund level. So the fund receives 1.7% after tax.
The accumulating class reinvests that 1.7%, and its unit ends the year at about S$107.70. The distributing class ends the year at about S$106 and has paid you S$1.70 in cash. Add them up and you also have S$107.70.
Before your own costs and your own behaviour, the total return of the two classes on the same index should be very close. Small gaps can appear, for example from the timing of reinvestment, but they are small next to what comes after the cash lands in your account. Whether you reinvest it, how much commission that costs, and how long it sits idle first are where the real difference lies, and lesson 4.2 picks those up.
To see the mechanics on a real fund, look for one offered in both classes and compare the two factsheets. The unit prices will differ, and the dividend policy line will say "accumulating" or "distributing" in plain words.
Find one fund offered in both share classes and compare their unit prices and stated dividend policy in two sentences.
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