Accumulation Plan

What Is an Accumulation Plan?

An accumulation plan is a general financial strategy in which an investor attempts to build the value of a 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 mutual fund through regular contributions and the increase in the value of the fund's portfolio.

Key Takeaways

  • An accumulation plan is an investment strategy that can help investors increase the value of their portfolios.
  • Mutual fund investors will often use an accumulation plan to contribute a specific amount of money to the fund on a periodic basis.
  • The goal of an accumulation plan is to invest in the funds over a long period, reinvest income and capital gains, and take advantage of compounding.
  • Accumulation plans also enable investors to benefit from dollar-cost averaging.

How an Accumulation Plan Works

Investors who implement an accumulation plan do so with the aim of achieving capital appreciation. Their focus is to benefit from the increase in the value of the assets they own, such as stocks, bonds, and mutual funds. Accumulation plans enable investors to invest fixed amounts of money on a regular basis—frequently monthly—over a long time frame.

These plans are often ideal for the small investor who does not have a large sum to invest upfront but is able to budget a set amount of money each month for investment. Investors will use these plans to achieve long-term goals, such as investing for retirement or a child's college education.

Capital Accumulation

In economics and accounting, capital accumulation is often equated with the investment of profit income or savings, especially in real capital goods. While individual investors can review their capital accumulation through the changes in their portfolio's value, companies use financial statements to help measure and analyze their capital accumulation.

Companies can achieve capital accumulation through the expenditure of money and through other measures as well. For example, a company could increase production by instituting new procedures that improve factory workflow and eliminate bottlenecks. These procedures could cost very little to nothing at all, yet over time they could yield significant profits.

For companies, capital accumulation ordinarily refers 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 physical assets such as residential or commercial real estate that could rise in value.

Benefits of 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.

Dollar-Cost Averaging

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. Dollar-cost averaging is a conservative investment strategy that allows the investor to allocate the money available for investing over a specified time. Instead of investing all available money at once, the investor commits to investing a fixed dollar amount on a particular investment on a regular schedule regardless of the share price.

The investor will buy more shares when the price is lower and fewer shares when the price is higher. Thus, dollar-cost averaging results in a lower average cost per share and reduces risk by enabling investors to offset short-term volatility.

An investor with a mutual fund accumulation plan may at some point want to develop a withdrawal plan, which is a payment structure that allows the investor to make periodic withdrawals. Providing a reliable income stream during retirement is one reason for having a withdrawal plan.

Voluntary Accumulation Plan

A voluntary accumulation plan is an investment method in which a retail investor periodically invests (at their 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. The ease of investment is another benefit as investors can set up the plan and allow it to automatically purchase shares of the fund each month.

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