A mutual fund is an investment company that pools money from many people and invests it in stocks, bonds, or other securities.
Each investor owns shares, which represent a part of these holdings.
Dividends are distributed to shareholders on a pro-rata basis.
Short-term capital gains Short-term capital gain distributions (representing the fund's net gains from the sale of securities held in its portfolio for one year or less) made by a fund are generally treated the same as dividends for tax purposes.
Long-term capital gains Long-term capital gain distributions (representing the fund's net gains from the sale of securities held in its portfolio for more than one year) are made to the fund's shareholders on a pro-rata basis.
Money is made from a mutual fund when the stocks, bonds, or other securities increase in value or issue dividends.
Usually, you can accept payment for distributions and dividends, or you can reinvest them in the fund, often without paying an additional sales load.
This generally occurs when a distribution involves recovery of all or a portion of your cost basis (i.e., the amount of your investment) in the fund.
Such a distribution is not subject to taxation because it does not represent investment earnings.
Investors can buy shares (or portions) directly from the fund or through brokers, banks, financial planning professionals, or insurance agents.
All mutual funds will redeem (buy back) your shares on any business day and must send you the payment within seven days.
When you buy shares, you pay the current net asset value (NAV) (the value of one share in a fund) per share, plus any sales charge (known as a sales load).
When you sell your shares, the fund will pay you NAV less any other sales load.
Shareholders must report the amount distributed in their tax returns as a long-term capital gain (regardless of how long the shares have been held), subject to capital gains tax rates.