Accumulation plan is a general investment strategy in which an investor aims to increase a portfolio's value.
How an Accumulation Plan Works
In the sense of mutual funds, an accumulation plan is a structured agreement in which an investor contributes a set sum of money to the fund regularly. The investor builds up a more significant stake in the mutual fund via daily contributions and the fund's value growth.
Investors who follow an accumulation plan do so in the hopes of seeing their investments grow in value. Their primary objective is to profit from the appreciation of their properties, such as stocks, shares, and mutual funds. Accumulation plans allow investors to regularly put money aside in fixed amounts—often monthly—for an extended period.
These plans are frequently suitable for small investors who don't have a large sum to spend upfront but can budget a fixed amount of money for investment per month. Investors can use these plans to meet long-term objectives, such as saving for a child's college education or retirement.
In accounting and economics, we can't talk about capital accumulation without referring to the expenditure of benefit income or savings, especially in actual capital goods. Companies use financial statements to calculate and assess their capital accumulation, while individual investors may review their capital accumulation by adjusting their portfolio's value.
Companies can build up their resources by both financial and non-financial methods. For example, a business might boost output by implementing new procedures that streamline factory workflow and remove bottlenecks. These procedures could be very low-cost or even free, but they could produce considerable profits over time. When it comes to businesses, capital accumulation typically refers to the following:
- Acquisitions, R&D, and other investments that can increase capital flow are examples of actual investments in tangible means of production
- Profit, rent, interest, royalties, fees, or capital gains are all possible outcomes of investing in financial assets represented on paper
- Physical properties, such as residential or commercial real estate that have the potential to appreciate in value
Investors who want to develop their mutual fund positions over time can benefit from an accumulation plan. It also offers dollar-cost averaging advantages. Dollar-cost averaging is a conservative investment technique that allows investors to spread their money out over a while.
Rather than spending all available funds at once, the investor commits to investing a set dollar sum regularly in a specific investment, regardless of the share price.
When the price is lower, the investor will buy more shares, and when the price is higher, the investor will buy fewer shares. As a result, dollar-cost averaging lowers the average cost per share and reduces risk by allowing investors to hedge against short-term fluctuations.
Example of an Accumulation Plan
Mr. and Mrs. Smith are both 30 years old and want to invest money in a Roth IRA for their retirement. They can put $20,000 in the account to start with, and they both plan to retire at 65 years old. They can only afford to put about $435 in their retirement account each month.
But at an expected rate of return of 7% and a marginal tax rate of 25%, they could make total contributions over time of $182,700. By the time they retire, their IRA balance could be worth $985,640.
Accumulation Plan vs. Voluntary Accumulation Plan
A cautious accumulation plan is essential for creating a financial nest egg for retirement. Many investors build up investment funds through daily contributions and dividends, and capital gains reinvestment. In general, the goal is to keep funds invested for as long as possible, reinvesting income and capital gains, allowing these to compound.
A voluntary accumulation plan is an investment strategy in which a retail investor invests small sums of money into a mutual fund on a regular basis (at their discretion), accumulating a significant stake over time.
Investors benefit from dollar-cost averaging by extending their investments over time because fixed contributions can buy more shares in a mutual fund when the price is low than when it is high. It's an excellent choice for someone who wants to start building an investment portfolio but can't afford to spend lots of money all at once.
Along with all the benefits of establishing an investment over time, the voluntary accumulation plan has the advantage of being a low-risk investment choice with mutual funds. Another advantage is the simplicity of investing, as investors may set up the plan to buy shares of the fund each month automatically.