How do mutual fund distributions work?

Distributions may be in the form of capital gains, interest income, or foreign source income or “taxable dividends”.

Because mutual funds invest in a variety of different assets, income can be earned from dividends on stocks and interest on bonds held within the fund’s portfolio. A fund will typically pay out a portion of the income it receives over the year to fund owners. Also, if the fund sells securities that have increased in price, most will pass on these gains to investors in the form of a distribution.

Finally, if a fund’s Net Asset Value (NAV) increases in value but is not sold by the fund manager, the fund’s units will increase in price. Investors can then sell their mutual fund units for a profit in the market.

Distributions are generally taxable to the investor whether the distributions are paid out in cash or reinvested into the mutual fund.