Funds Beginner: Earnings from Mutual Funds

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1.
A mutual fund may assume that you want a dividend reinvestment plan when you open an account.
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True. Reinvestment may be a default if you do not select an option.
2.
Because it is a sum, a total return is positive.
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False. If there has been a substantial loss in net asset value, the sum may be negative.
3.
Returns of capital are generally taxed at your ordinary income tax rate.
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False. They are generally not taxed at all. However, if the return of capital exceeds the amount of after-tax dollars invested (basis), then they can be taxed as a capital gain.
4.
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.
5.
Mutual fund dividends are passed to investors from ______.
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The earnings of the securities in a fund. The fund passes earnings from its portfolio in the form of dividends to its shareholders.
6.
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.