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Funds 103: Earnings from Mutual Funds

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1.
Reinvested dividends are tax-free because they don't reach the investor.
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False. As long as they are earned, they will be taxed no matter where they end up.
2.
How does a mutual fund increase its value?
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It receives the dividends, interest, and capital gains from the securities in its portfolio. The fund then passes these earnings to shareholders.
3.
A return of capital is a type of what?
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None of the above. Returns of capital are merely your own money returned to you.
4.
Ordinary dividends are earned when a mutual fund sells securities for a profit.
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False. Capital gains dividends are earned in this way, but ordinary dividends are distributions of interest or dividends from the fund's holdings.
5.
Total return includes capital gains distributions.
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True. Capital gains distributions are dividends.
6.
A capital gain on a share held for five years will be taxed at a lower rate than a share held for four months.
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True. Once you have held a share for more than one year, your capital gains tax drops.