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.
You earn capital gains from your mutual fund shares when you sell them for a profit.
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True. Capital gains result from selling your assets that have risen in value.
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 mutual fund with a 5 percent total return and a 7 percent dividend yield will have _______ 2 percentage points in its net asset value.
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Lost. Total return – yield = net asset value. In this example, net asset value has dropped.
5.
Which of the following is not a dividend?
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The sale of a mutual fund share. When individual shareholders sell their shares, these shares are not dividends.
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.