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Mutual Fund Return of Capital

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Mutual Fund Return of Capital

Not everything a fund pays you is an earning. There are times when a fund will give you back your own money. This can happen even if you have not sold any shares.

Things To Know

  • Sometimes a fund will return your own shares to you.
  • A return of capital lowers your basis in your shares.

What is a return of capital?

A return of capital is the return to you of part of the money you invested in the fund.

Why they are made

Returns of capital may be made to investors for many reasons. The fund managers may feel they have excess cash, so distributing it to shareholders will lower the fund’s net asset value, which could result in attracting new investors at the lower price.

A return of capital lowers the investor’s basis in their shares. A return of capital distribution is not taxed as ordinary income because it is not earned income. However, lowering of basis may result in higher capital gains when the shares are sold by the investor.