Understanding Capital Gains Distributions in Mutual Funds

A capital gains distribution is something that you need to be aware of as a mutual fund investor. Here are the basics of the capital gains distribution and how it can affect you individually.

Capital Gains Distributions

Throughout the year, a mutual fund will use your money and the money of others to trade securities. Most of the time, they will make some type of profit over the course of the year. At the end of the year, the mutual fund will distribute the gains that they have made back to the investors. They will take all of the profit and divide it according to how many shares you have. This can provide you with a nice payment depending on how much you have invested in the fund.

Investment Implications

The capital gains distribution can have an impact on you individually. If you decide to purchase shares in a mutual fund towards the end of the year, it could actually hurt you as far as taxes are concerned. Even though you have only been involved with the fund for a short period of time, you will still have to pay taxes on the full amount of the distribution. You will have to deal with a net asset value that is lessened from the distribution.