Anyone buying yen these days?

[northSaver]

You'll want to avoid dividend stocks in an Nisa though, and go with accumulating funds ideally.

You don't want to want to poke holes in the bucket...

Sorry for the digression, but why should we avoid dividend stocks in a NISA? The dividends are tax-free, aren't they? At the end of the year they could be put towards a new NISA. I think they only distribute once or twice a year anyway. But yeah, you're right... accumulating is better, if you can get it.

[adamu]

why should we avoid dividend stocks in a NISA?

If the fund is accumulating, the dividends are reinvested internally and the full amount can continue to be tax deferred (potentially for years) until you sell for a capital gain.

If you receive a dividend, it's a one off payment, and if you want to reinvest that money you have to use additional allowance.

[northSaver]

Thanks adamu. Yes, I agree that accumulating makes more sense if you buy and hold one just one year's NISA allowance. But this got me thinking. What happens if you fill new NISAs every year for 10 years? If the fund is distributing then you'll use less new money each year, because the dividends from the previous NISAs will go towards the new NISAs.

Here are the results of some quick calculations based on the following hypothetical assumptions:
1. The NISA grows 10% each year.
2. The dividend yield is 5% each year.
3. You keep all the money invested for ten years.

Case 1
If you start with 1.2 million yen in a distributing fund, then each year you will use less of your own money to fill the subsequent years because the dividends will go towards them. The longer you do it, the more dividends you can use, and the less of your own money you will need. In short:

Total invested = 8,432,000 yen
Total value of all NISAs after 10 years = 21,710,000 yen

Case 2
If you do the same with an accumulating fund (assume 15% growth instead of 10% to keep it simple), AND only invest the same amount of new money each year as in Case 1, then:

Total invested = 8,432,000 yen
Total value of all NISAs after 10 years = 21,980,000 yen

This is remarkably similar to Case 1!

Of course, Case 1 involves more hassle each year, and why wouldn't you use your full allocation in Case 2 if you could afford it? I suppose it might make sense if you were retired and wanted to save less and less each year?

Case 3
This assumes only one 1.2 million yen NISA is held for ten years (rolled over after five).
Total invested = 1,200,000 yen
Total value of distributing fund after 10 years = 4,069,000 yen (including 967,000 dividends)
Total value of accumulating fund after 10 years = 4,855,000 yen

Clearly the accumulating fund performs better in this situation.

I hope my calculations are right. I can post the details if anyone's interested. In conclusion, I think accumulating funds are much better if you're in "accumulating mode" (saving for retirement), whereas distributing funds might be worthwhile if you're in or approaching "distributing mode". Kind of stating the obvious I suppose!

[adamu]

I didn't really follow.

You can invest a total of 6M tax free in a NISA at any one time (1.2M/year x 5 year sliding window).

If you invest in accumulating funds, all the money you put in and the dividends roll up into delayed capital gains. 6M + all dividends reinvested and deferred.

If you invest in distributing funds, the dividends are paid out and do not compound further. Same 6M in, less out at the end because less deferred.

Of course it depends on the market and any particular strategy could win given the right conditions.

[Haystack]

Hypothetical assumptions

I didn't really follow.

You can invest a total of 6M tax free in a NISA at any one time (1.2M/year x 5 year sliding window).

If you invest in accumulating funds, all the money you put in and the dividends roll up into delayed capital gains. 6M + all dividends reinvested and deferred..

North seems to think that the dividends in an accumulating fund count against the amount you contribute.

They do not. That's the advantage.

[zeroshiki]

Also, for most of those funds, the "dividends" aren't actually dividends but are actually part of the fund itself. So they're actively selling off the fund just to give you those dividends. I asked this same question here before and someone explained it to me.

[northSaver]

I didn't really follow.

You can invest a total of 6M tax free in a NISA at any one time (1.2M/year x 5 year sliding window).

Yes, good point. If you want to invest purely in regular NISA over a period of ten years, then after the 5th year you won't be able to put any new money in because you'll have to rollover the 1st year, and so on. So you won't be able to reinvest your dividends, in the case of a distributing fund, from Year 6. I'll have to recalculate the figures based on that, but I can see right away that that's going to put the accumulating fund ahead

North seems to think that the dividends in an accumulating fund count against the amount you contribute.

They do not. That's the advantage.

No, I don't think that. I was just purposely reducing the new money invested in the accumulating fund each year to make the total investment amounts the same in each case. Why? So we can compare the results of each strategy like for like.
Don't forget that the distributed dividends in Case 1 pay towards the new 1.2 million allocation each year (after the 1st year) so you won't need to use as much of your own money to fill the allocation.

Also, for most of those funds, the "dividends" aren't actually dividends but are actually part of the fund itself. So they're actively selling off the fund just to give you those dividends. I asked this same question here before and someone explained it to me.

Hmm, I'm not sure if this makes much difference? The fund manager definitely receives those dividends from the stocks they hold, maybe not all at the same time, but they get the cash. Do they put that cash in a separate pot, in order to pay the fund holders? Or do they buy more stocks with it then sell some off when the time comes, in order to pay the fund holders? Does it depend on what the market's doing at the time? Does it affect how much the fund holders get? Do they take a cut, on top of the fund management fee?
These are all interesting questions and I'm really not sure how much impact they have on the end result.

[TBS]

I kind of get what you are thinking northSaver, but no I also do not think it is a good idea.

There is the reason already stated: using distributing funds means you cannot "grow" your tax-free NISA allowance like is possible with accumulating funds.

But also because taking dividends out only to put them back in again later means the money spends longer out of the market than it otherwise would, and you miss out on that growth.

In conclusion, I think accumulating funds are much better if you're in "accumulating mode" (saving for retirement), whereas distributing funds might be worthwhile if you're in or approaching "distributing mode". Kind of stating the obvious I suppose!

If we're taking about within a NISA, even in "distributing mode" accumulating funds have the advantage of flexibility: you can take the money when it suits your schedule, rather than receiving regular payouts from a distributing fund when you maybe do not need the cash.

Outside of NISA, distributing funds may have the advantage in some circumstances as you can claim US foreign taxation relief. Some discussion on that here: viewtopic.php?t=1453

[northSaver]

But also because taking dividends out only to put them back in again later means the money spends longer out of the market than it otherwise would, and you miss out on that growth.

Yeah, I considered that but concluded that sometimes it will be to your advantage (if the market drops before you buy), and sometimes to your disadvantage (if it rises before you buy). However, over time the market will rise more times than drop, so I agree that this will have a detrimental effect over the long run.

If we're taking about within a NISA, even in "distributing mode" accumulating funds have the advantage of flexibility: you can take the money when it suits your schedule, rather than receiving regular payouts from a distributing fund when you maybe do not need the cash.

Yeah, good point.

Anyway, I've recalculated based on the truth of not being able to have more than five NISAs going at the same time (no idea how I missed that one), and...

The results are still almost the same!

Total invested = 5,336,000 yen
Total return in Case 1 (distributing) = 16,838,000 (including 3,861,000 dividends NOT reinvested after Year 5)
Total return in Case 2 (accumulating) = 16,943,000

WTF? Am I calculating it right? I really thought the accumulating one would win hands down in this situation. Only 105,000 yen difference after 10 years at such high rates of return doesn't sound right. What's more, if you reinvested the dividends in a normal account after Year 5 then Case 1 would probably come out on top? That can't be right... can it? If anyone else wants to crunch the numbers...

Despite this I would prefer NOT to buy distributing funds in a NISA if possible. Thanks for enlightening me guys. So the big question is:

What is the best accumulating Japanese-only stock fund to buy that has low fees and high yield? And preferably is available on SBI since that's what I'm applying for. Thanks!

[Haystack]

But also because taking dividends out only to put them back in again later means the money spends longer out of the market than it otherwise would, and you miss out on that growth.

Yeah, I considered that but concluded that sometimes it will be to your advantage (if the market drops before you buy), and sometimes to your disadvantage (if it rises before you buy). However, over time the market will rise more times than drop, so I agree that this will have a detrimental effect over the long run.

If we're taking about within a NISA, even in "distributing mode" accumulating funds have the advantage of flexibility: you can take the money when it suits your schedule, rather than receiving regular payouts from a distributing fund when you maybe do not need the cash.

Yeah, good point.

Anyway, I've recalculated based on the truth of not being able to have more than five NISAs going at the same time (no idea how I missed that one), and...

The results are still almost the same!

Total invested = 5,336,000 yen
Total return in Case 1 (distributing) = 16,838,000 (including 3,861,000 dividends NOT reinvested after Year 5)
Total return in Case 2 (accumulating) = 16,943,000

WTF? Am I calculating it right? I really thought the accumulating one would win hands down in this situation. Only 105,000 yen difference after 10 years at such high rates of return doesn't sound right. What's more, if you reinvested the dividends in a normal account after Year 5 then Case 1 would probably come out on top? That can't be right... can it? If anyone else wants to crunch the numbers...

Despite this I would prefer NOT to buy distributing funds in a NISA if possible. Thanks for enlightening me guys. So the big question is:

What is the best accumulating Japanese-only stock fund to buy that has low fees and high yield? And preferably is available on SBI since that's what I'm applying for. Thanks!

I really am not following your math. Would you mind mapping it on Excel?

Why not simple compare two funds that track the same index.

Exmaxis slim S&P500 Mutual Fund

Maxis S&P500 ETF.

That will give you a good idea of the operational differences.