DEFINITION of Accumulation Plan
An accumulation plan is a general financial strategy in which an investor attempts to build the value of his or her portfolio. In the context of mutual funds, an accumulation plan is a formal arrangement in which an investor contributes a specified amount of money to the fund on a periodic basis. By doing so, the investor accumulates a larger and larger investment in the fund through his or her contributions and the increase in value of the fund's portfolio.
BREAKING DOWN Accumulation Plan
In economics and accounting, capital accumulation is often equated with investment of profit income or savings, especially in real capital goods.
Capital accumulation refers ordinarily to:
- Real investment in tangible means of production, such as acquisitions, research and development and other investments that can increase the capital flow.
- Investment in financial assets represented on paper, yielding profit, interest, rent, royalties, fees or capital gains.
- Investment in nonproductive physical assets such as residential real estate or works of art that could rise in value.
Why Have an Accumulation Plan
A prudent accumulation plan is key to building a financial nest egg for retirement. Many investors accumulate investment funds with regular contributions and the reinvestment of dividends and capital gains. Generally, the goal is to keep funds invested, reinvest income and capital gains, and have these compound for as long as possible.
An accumulation plan can also be useful for investors who wish to build their positions in a mutual fund over time. It also provides the benefits of dollar-cost averaging.
Voluntary Accumulation Plan
A voluntary accumulation plan is an investment method in which a retail investor periodically invests (at his or her discretion) relatively small amounts of money into a mutual fund, building a large position over an extended period.
By spreading the contributions over a period of time, investors reap the benefits of dollar-cost averaging because the fixed contributions will buy more shares of a mutual fund when its price is low than when it is high. This can be an excellent solution for anyone who wishes to build an investment portfolio but is not in a position to invest a large sum of money at one time.
Along with the advantage of being able to build up an investment over an extended period, the voluntary accumulation plan has the benefit of being an investment option with mutual funds that are considered to be relatively low risk. Another benefit is that the plan allows mutual fund investors to take advantage of dollar-cost averaging.