At the end of the
year, many growth-oriented mutual
funds will
distribute two forms of income to shareholders: (1) a share of
the dividends the
fund receives from the companies in which it is invested and
(2) capital
gains received
from its investments during the year. On the day that a mutual
fund distributes income from dividends or capital gains, the
fund's share price will go down. But that doesn't mean you've
lost money.
If you reinvest
the distribution, you will have more fund shares at the lower
share price but still have the same account balance. If you
take the distribution in cash, you will have the same number
of shares you started with and money in your pocket. The
following example shows how it works. We imagined two
shareholders in ABC Capital Growth Fund, Jack who has signed
up for reinvestment of
distributions and Jill who has chosen to receive distributions
in cash.
Both Jack and Jill
have $2,000 after the distribution. It's just that Jack has it
all in his mutual fund account, while Jill has $1,900 in her
account and $100 in cash.
Distributions from
mutual funds are reported to the Internal Revenue Service
(IRS) as income for federal tax purposes. IRS publication 929
explains federal tax reporting requirements as they relate to
kids. You can get a copy of this publication online from the
IRS at www.irs.gov .
Past performance is no guarantee of future
investment results. The example above is for illustrative
purposes only and does not reflect the performance of any
mutual fund.
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