Mutual Fund Income and Distributions
(5 of 10)
Mutual Fund Income and Distributions
Mutual funds offer more than one source of income.
Things To Know
- Dividends are paid from the earnings of the securities in the funds.
- When a security in a fund is sold, any gain or loss on it must be distributed to shareholders.
- The fund itself may experience gains in value.
Dividends
Mutual funds pay their shareholders dividends from the earnings of the stocks, bonds, and other securities in the funds. You can receive dividends as cash, or you can reinvest them into the funds. Many funds will automatically reinvest your dividends if you authorize them to. Most dividends will be taxed at favorable long-term capital gains rates. If the dividends come from a return of capital or a tax-free municipal bond fund they will be tax-free. If the dividends are received within a tax-favored retirement account, the tax will be deferred.
Capital gains distributions
Another source of potential income in mutual funds is capital gains distributions. When a security in a fund is sold, any gain (or loss) on it must be distributed to shareholders. You can receive your capital gains distributions as cash, or you can have them reinvested. The taxation rules that apply to dividends also apply to capital gains distributions.
Capital gains
You may also benefit from share price increases. These are the rises in value of a share of your fund. If the price of one share increases by one dollar, you have made a gain of one dollar times the number of shares you own. This type of gain is called paper profit because you do not receive it until you sell shares. Once you have sold the shares, you then have a capital gain. Conversely, a fund can decrease in value as well. Should you sell your investment at a capital loss, as it is called, you may be eligible to use those losses to offset the gains of other investments for tax purposes. Consult a tax advisor to learn more.
When you add them all up …
All of these sources of gain make up the total return of a mutual fund. Depending on the type of account and investment, you may need to consider the effect that taxes may have on your total return.
