An Introduction To Investment Accumulation Plans

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Among the several services offered to investors by most investment companies, one of increasing popularity is the accumulation plan. There are many variations of this service among the contractual and voluntary plans established by investment companies, but they all have a common purpose—to enable investors to purchase shares on a regular or periodic basis.

Finding wide acceptance only in the past decade, these plans have grown to such an extent that recently about 30 percent of all shareholder accounts in open-end investment companies were of the accumulation type. Through the Monthly Investment Plan of the New York Stock Exchange, investors have a similar opportunity for accumulation of shares of a number of closed-end companies.

There are sound reasons for the increasing acceptance of accumulation plans. First of all, this trend coincides with the rapidly growing participation by the general public of this country in the opportunity for and, indeed, responsibility for, equity investment in private enterprise.

Also, a factor of paramount importance to investors in relatively modest income tax brackets is that an opportunity is thus opened for planning and building an investment program with small purchases, using current income. There is no waiting for the accumulation of capital; yet, at the same time, buying is not done on a credit basis. The investor's money is invested in full and fractional shares at the public offering price in effect at the time payment is received.

In addition, a program for the accumulation of shares at regular intervals gives added incentive for maintaining regular payments toward a long-term investment program. Naturally, this is most particularly true of the contractual plans. Another recommendation for accumulation plans is that regular purchases of shares on a periodic basis offer the investor the logical expectation, elsewhere discussed under "dollar cost averaging," of acquiring shares at a reasonable average cost.

Basically, there are two types of accumulation plans—voluntary and contractual. The former is also known as the level charge or informal plan, under which no definite time period or fixed payment schedule is obligatory. The investor may withdraw from such plans at any time and with no penalty, since the sales charge, or deduction for issuance and sales expense, is deducted at the same rate with every payment. On the other hand, a contractual plan commits the investor to acquiring fund shares by fixed dollar payments, usually on a monthly or quarterly basis over a specific number of years. This plan is often known as a prepaid charge plan, penalty plan, or front-end load plan because the sales charge is deducted for the most part against payments made during the first year or two of the plan. It is this plan in particular which encourages a sustained in–vestment program, for if it should lapse a large percentage of the investment is lost, having been deducted for expenses.

There are differences in ground rules of many sorts among the accumulation plans offered by various investment companies. In general, the voluntary plans are opened by filling out an application form on which is stated the amount of initial investment, the amount intended to be invested regularly in the future, the dates on which such investments will be made, and whether automatic reinvestment of dividends and distributions is desired.

Contractual plans are opened in much the same way, as are voluntary plans. In addition, a period for the life of the plan will be fixed, and monthly payments or total investment required will be specified. This is another type of investment that some individuals might find attractive to add to their increasingly diverse portfolios.

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