A person who owns units in a fund is, depending on the fund, also participating in the performance of various securities, generally speaking shares and bonds. These provide investors with all sorts of profits, for instance in the form of dividends and interest. Here is an overview of the types of payment you can expect as someone who owns fund units or securities:
Dividend, interest, return and distribution – four opportunities for profit explained in simple terms
Dividends, interest, returns and distributions – all four promise some kind of profit. But what do these terms actually mean and how do they differ? We are going to explain the differences between these four key profit-related terms using the example of a fund.
Dividend: company profit for shareholders
The share of a company's profit that goes to the shareholders is known as the dividend. The dividend sum depends on how much net profit is made, and how many shares each shareholder holds. A fixed sum is paid out for each share. Each year, once net profit has been made, the dividend is distributed amongst shareholders shortly after the General Meeting (GM). If, however, a company has made no profit, then the shareholders too generally come away empty-handed, that is unless the company decides to use its reserves to pay out a dividend.
Interest: yearly payments for bondholders
A person who owns bonds is entitled to interest. Unlike dividends, interest does not depend on profit, and is already set when the bond is issued by the issuer. Interest is also known as coupon and is generally expressed as a fixed percentage of the nominal amount. The coupon is paid out once a year. This makes bonds quite similar to a savings account: a fixed percentage of interest is paid on an amount, and then paid out at the end of the year.
Yet there are bonds where the interest is not paid out on a yearly basis. You can find out more in the article “What are the most common types of bonds?”
Returns: ways to compare various investments
Return is a key concept that frequently crops up in investment. It is a useful gauge for comparing various financial investments, i.e. bonds and shares. The return refers to the overall success of an investment compared against the capital you as an investor have deployed. With a share, for instance, you calculate the average return by subtracting the price of the share at time of purchase from the current price of the share, adding the dividend, and you then divide everything by the initial price of the share. The initial price of a share is often known as the purchase price, and comprises, in addition to the purchase price itself, all additional costs, such as fees. The purchase price varies depending on how many shares an investor buys. In the case of a fund, the return is comprised of revenue (dividends on shares as well as interest on bonds and exchange gains) in addition to any price variations on those assets in the fund.
Distribution: payouts for fund owners
In the event of distributions, interest and dividends once again play a role. If you are investing in an accumulation fund, the revenue from each investment position will be invested back into the fund, in other words not distributed. The interest on a bond or the dividend on a share are not paid out directly to you, but reinvested on an ongoing based back into the fund assets. With a distributing fund this revenue is paid out to the shareholder. This means the investor receives the fund income, which can be paid out either once a year, once every six months or once every three months.
By familiarizing yourself with these key profit terms, you will be able to classify profit from funds and securities more effectively, and you will be able to compare different investments with ease.