Index Trackers Explained: Accumulation vs Income vs 'Mirror Only' Funds
Published / Last Updated on 21/05/2026
Index tracker funds are a simple, low‑cost way to invest in the stock market. But not all trackers work the same way. Some pay dividends out, some reinvest them automatically, and a small number only track share prices while keeping the dividends to keep charges even lower.
Understanding the difference is essential for choosing the right option for your goals, tax position, and investment timeframe.
1. The Three Types of Index Tracker Funds
A. Income (Inc) Units – Dividends Paid Out
Income units follow the index and pay dividends to you as cash.
They suit investors who want regular income or who prefer to manage reinvestment themselves.
B. Accumulation (Acc) Units – Dividends Reinvested
Accumulation units follow the index and automatically reinvest dividends back into the fund.
They suit long‑term investors who want compounding growth without manual reinvestment.
C. “Mirror‑Only” Price Trackers – Dividends Not Included
A small number of funds track only the price movements of an index.
They do not pay dividends and do not reinvest them.
The fund manager retains the dividend income internally, which is why fees can appear extremely low.
These are not true total‑return trackers and will underperform the index by roughly the dividend yield over time.
2. Comparison Table: Inc vs Acc vs Mirror‑Only
| Feature | Income (Inc) | Accumulation (Acc) | Mirror‑Only Price Tracker |
|---|---|---|---|
| Tracks dividends? | ✔ Yes | ✔ Yes | ✘ No |
| Pays dividends out? | ✔ Yes | ✘ No | ✘ No |
| Reinvests dividends? | ✘ No | ✔ Yes | ✘ No |
| Matches total‑return index? | ✔ Yes | ✔ Yes | ✘ No |
| Long‑term performance | High | High | Low |
| Typical fees | Low | Low | Very low |
| Suitable for income investors? | ✔ Yes | ✘ No | ✘ No |
| Suitable for long‑term growth? | Moderate | ✔ Yes | ✘ No |
| Suitable for ISAs? | Yes | Yes | Yes |
| Tax in a GIA | Dividends taxable | Notional dividends taxable | Lower income but lower returns |
3. Why Dividends Matter
Most major indices publish two versions:
- Price Return (PR) – only share price movements
- Total Return (TR) – price + dividends reinvested
True trackers (Inc and Acc) follow the total‑return version.
Mirror‑only funds follow the price‑only version.
Over long periods, dividends make up a significant portion of total market returns.
For example, the FTSE 100’s price level has barely moved since 1999 — but its total return (including dividends) has more than doubled.
This is why choosing the correct share class matters.
4. Tax Considerations for UK Investors
Inside an ISA or Pension
- No dividend tax
- No capital gains tax
- Acc and Inc units are equally tax‑efficient
Inside a General Investment Account (GIA)
- Income units: dividends are taxable
- Accumulation units: dividends are still taxable (HMRC treats reinvested dividends as income)
- Mirror‑only funds: lower taxable income, but also lower long‑term returns
The wrapper (ISA/SIPP) matters far more than the share class.
5. When Each Type Makes Sense
Choose Income (Inc) if you want:
- Regular cashflow
- To manage reinvestment manually
- Clear visibility of dividend income
Choose Accumulation (Acc) if you want:
- Long‑term compounding
- Simplicity
- No need to handle dividend payments
Avoid Mirror‑Only Funds unless you want:
- Short‑term tactical exposure
- Pure price tracking
- Ultra‑low fees and you understand the trade‑off
For most long‑term investors, Acc or Inc units are the correct choice.
6. Frequently Asked Questions (FAQ)
Do accumulation funds avoid dividend tax?
No. In a GIA, HMRC taxes “notional dividends” even if they are reinvested automatically.
In an ISA or pension, no dividend tax applies.
Why do some trackers have extremely low fees?
These are often price‑only mirror funds that exclude dividends.
They look cheap but deliver lower long‑term returns.
Is an Acc fund better than an Inc fund?
Neither is “better” — they are simply different ways of handling dividends.
Acc is usually preferred for long‑term growth; Inc is preferred for income.
Why does the FTSE 100 look flat over 20 years?
Most charts show the price index, not the total‑return index.
When dividends are included, long‑term returns are significantly higher.
Are index trackers still good if markets move sideways?
Yes — provided you use total‑return trackers (Acc or Inc).
Dividends continue to compound even when prices stagnate.
Do I need to time the market with trackers?
No. Trackers are designed for long‑term investing, not timing.
Consistent contributions and diversification matter far more.
