Welcome to Making Sense of Mutual Fund Distributions. In Part 1, we dive into mutual fund distributions – what they are, and how they work.
Mutual funds are required to pay out income and capital gains to their unitholders. The income can come from different sources, like :
- interest from bonds
- dividends received from stocks
- and capital gains from selling securities in the fund
For each unit you hold, you get a payout called a ‘distribution,’ which is either paid in cash or reinvested to buy more units.
Because the fund’s income is taxed at a higher marginal tax rate...
which is usually more than what an individual investor might pay, distributions are paid to:
- eliminate the tax owed by a fund
- and pass the income on to investors
Distributions can be paid monthly, quarterly or annually. Or, in some cases, not at all.
The size of a distribution depends on:
- interest rates
- dividends received
- capital gains and losses
and more.
Remember: distributions can mean extra income for investors. But they are not guaranteed.
To learn more about distributions, talk to your advisor or a qualified tax specialist.
Stay tuned for part 2 and 3 of our series.