Mutual funds earn money on their investments through one of two ways: dividend income and capital appreciation. In other words, a mutual fund makes money on one of the fund's assets when that asset pays the mutual fund dividends or interest, or when the mutual fund sells the asset for more than what it initially paid (if it sells the asset for less than what it initially paid, then that is called a capital loss). The federal government mandates that all mutual funds distribute these dividends and capital gains to the fund's shareholders at least once per year. Most mutual funds choose to distribute their investment income on a quarterly, semi-annual or annual basis.
In order to determine which shareholders qualify for distribution payments, mutual funds specify a day during each distribution period that is known as the record day. If you own shares in a fund on or before the record day you qualify for a distribution. The day after the record day is known as the ex-dividend date. If you purchase shares on the ex-dividend date then the amount of the distribution is subtracted from the fund's net asset value (NAV) per share.
You should be aware that if you receive distributions from a mutual fund then you must pay taxes on them, regardless of how long you have owned shares in the fund and regardless of whether or not you received the distributions in the form of cash or in the form of new shares. In January of every year, mutual funds issue Form 1099-DIV to all of their shareholders as well as to the IRS in order to report income on distributions
In order to determine which shareholders qualify for distribution payments, mutual funds specify a day during each distribution period that is known as the record day. If you own shares in a fund on or before the record day you qualify for a distribution. The day after the record day is known as the ex-dividend date. If you purchase shares on the ex-dividend date then the amount of the distribution is subtracted from the fund's net asset value (NAV) per share.
You should be aware that if you receive distributions from a mutual fund then you must pay taxes on them, regardless of how long you have owned shares in the fund and regardless of whether or not you received the distributions in the form of cash or in the form of new shares. In January of every year, mutual funds issue Form 1099-DIV to all of their shareholders as well as to the IRS in order to report income on distributions
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