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I wanted to ask a few questions regarding Index funds and its dividends. The questions are the following:

  1. If I decided to invest 10k into an Index fund and contribute monthly around 100-200 and decide to reinvest the dividends over a period let's say 30 years, how exactly would I be able to access/withdraw this money when I am finished investing in this fund. Do I need to sell the Index fund? do I transfer the money I made from the fund into my bank account/savings account or do I need to do something else?

  2. Is it better to deposit any dividends into a into a tax free savings account like an ISA(UK) and contribute monthly payments to the Index fund rather than reinvesting the dividends. For example let's say I start with 10k in an Index fund and contribute around 100-200 a month into the fund and any dividends I make get automatically deposited into my savings account. So in essence the Index fund will increase monthly due to the contributions and any dividends will be deposited into a savings account. Is this approach sensible.

  3. If i reinvest dividends back into an Index fund, how exactly will any savings account be filled up if the dividends are automatically reinvesting into the fund.

I have read several books on Index funds and have gotten a good grasp on it, however I am confused with the whole dividend aspect of things. I just need to know which approach would be most suitable.

Thank you

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  • If you buy shares then reinvesting the dividends means that you buy more shares. If you want cash from this investment then you sell some/all of your shares. – Bob Baerker Jun 20 '20 at 18:26
  • If you want to invest on a regular basis alot depends on your broker. Do they reinvest the money (into fractional shares) or do you have to buy the shares yourself. Can you buy fractional shares at all or do you have to collect so much money that it's worth to buy. – Bernhard Döbler Jun 20 '20 at 19:03
  • Saw this question What to do with small dividends in brokerage account? – Bernhard Döbler Jun 21 '20 at 14:49
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Index funds generally come in two flavours - Accumulation and Income. For example, here's a FTSE 250 index tracker in Accumulation flavour, and here it is in Income flavour. Both are operated by the same company, using the same rebalancing method; the difference is in what happens to the dividends.

With the Accumulation flavour, the dividends paid out by the underlying stocks stay in the fund company and increase its value. In effect, dividend reinvestment happens automatically. With the Income flavour, dividend income is paid out to the fund holders, who can then do whatever they like with it.

Which to get depends on your purpose - accumulation or income (as the names suggest). There's essentially no point getting the Income flavour and using the income to buy more units - you're just doing what the Accumulation flavour would do for you with less hassle and transaction cost.

To your specific questions:

  1. (assuming you reinvest the dividends by buying the Accumulation flavour). You buy 10k worth of fund units, then 100-200 more each month. At the end of the 30 years, you sell your fund units. Those fund units will be worth more (probably), based on the changes in underlying stock prices and the 30 years of dividends

  2. This is the thing to do if you'd prefer dividend income as cash rather than reinvested, during the 30 years. At the end, your fund units will be worth more (probably) based on the changes in underlying stock prices alone

  3. You're right, you can't fill up a savings account and reinvest dividends

What is the difference between income and accumulation units? at one broker's website.

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