INCOME AND DISTRIBUTIONS

Mutual funds pay their shareholders dividends from the earnings of the stocks, bonds, etc. in the funds.

You can receive dividends as cash, or you can reinvest them into the fund. Many funds will automatically reinvest your dividends if you authorize them to. Any dividends will be taxed as though they were ordinary income, unless they come from a return of capital, a tax-free municipal bond fund, or are part of a retirement account.

Another source of potential income in mutual funds is capital gains. 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 as cash, or you can have them reinvested. The taxation rules that apply to dividends also apply to 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.

All of these sources of gain make up the total return (or just return) of a mutual fund.

Now we will begin looking at types of funds. We begin with stock funds.