Everything you need to know about mutual fund distributions
How do mutual fund distributions work?
There are strict rules surrounding mutual fund investment and how investors are compensated. If you invest in mutual funds, you’ve likely noticed capital gain or dividend distributions in the mail. If you want to invest in mutual funds, it pays to first have mutual fund distributions explained clearly. So, let’s go over mutual fund distributions.
What are mutual fund distributions?
Income mutual funds are businesses. As an investor in a mutual fund, you are a shareholder. Mutual funds produce profits by using the funds sold to you and other investors to make investments in other financial instruments. When a mutual fund makes a profit, it is legally obliged to share that profit with the shareholders.
Different mutual funds have different portfolios and follow different procedures. But they are always required to give their profits to you and the other mutual fund investors. They give those profits to you through mutual fund distributions.
Mutual funds distributions are the mechanism by which mutual fund investors receive their returns. Distributions are sent out according to the rules of the mutual fund.
What is the periodicity of mutual fund distributions?
Mutual fund distributions are normally passed onto investors once or twice per year. The timing can vary, but mutual funds that produce dividends or interest are distributed at least once per year.
The mutual fund distribution dates are also referred to as record dates. It’s the date during which investors are able to receive distributions if they have bought shares.
After the record date, there is the payable date. During the payable date, distributions of all types are either reinvested or paid to each investor. Payable dates can occur annually, semi-annually, and quarterly. Some funds pay their investors monthly. You can check with the mutual fund company you are considering to see the periodicity of their pay distribution.
Mutual fund companies tend to pay most of their gains to investors. That’s because all their income is taxable. Ultimately, mutual fund companies base their decisions on the investment strategies of the fund. Mutual fund managers normally focus on maximizing profits in line with their strategy, while handling tax obligations in the most efficient way possible.
Types of mutual fund distributions
There are several ways through which mutual funds create profits. Likewise, there are several different types of mutual fund distributions.
Mutual funds capital gains
Mutual fund capital gains are the profits created through the purchase and sale of assets. Mutual funds distribute the gains to their investors.
During the period between the distribution of funds, the fund’s management may buy and sell different securities. If these transactions create greater gains than losses, the fund must distribute the gains. Mutual fund payout includes the capital gains created between distributions.
Capital gains are one of the more efficient sources of income with mutual funds. Capital gains distributions aren’t normally taxed in their entirety. Also, significant income through capital gains is not taxed as much as other forms of income.
Mutual fund dividends
Mutual fund dividends are passed onto mutual fund investors.
Mutual funds often purchase shares of companies that pay dividends. Mutual funds essentially pool investor funds together. When those funds purchase shares in companies providing dividends, all the investors benefit from that income.
Normally, the company paying dividends to shareholders will have paid taxes on those dividends. Because the company already paid tax on its profits, shareholders benefit from after-tax income.
Some mutual funds specifically try to maximize dividend payouts. Dividend income mutual fund profit is then passed onto mutual fund investors when it’s time for distribution.
Mutual funds can produce interest income from the securities they contain. If a mutual fund holds fixed-income securities, mutual fund investors can receive the proceeds. Common examples include bonds, treasury bills, and certificates of deposit.
Interest is treated very similarly to dividends for mutual fund investors. When a mutual fund produces interest, it must be distributed during the regular distribution time.
Foreign non-business Income
Mutual funds can invest in foreign securities. When those securities produce interest, dividends, capital gains, or other income, the mutual fund will distribute those earnings.
Foreign non-business income is categorized separately from the other types of mutual fund distributions. However, for taxation purposes, it is categorized in the same way.
Return of capital distributions
Return of Capital (ROC) takes place when a mutual fund’s earnings are lower than its distributions. It’s essentially investors being paid back a portion of the capital they invested.
ROC distributions commonly occur when a mutual fund is set up to pay fixed monthly distributions to each investor. However, investors are receiving a portion of their invested capital, which carries different tax implications.
Because those “distributions” are their own capital, they are not immediately taxable. However, when the investor eventually sells, ROC distributions may cause deferred taxes, making capital gains tax obligations higher.
Your Bottom Line
Mutual funds are a popular investment type for a reason. When you invest in a good mutual fund, you can collect distributions produced by any of the types of mutual fund distributions we’ve covered.
The key to your bottom line is choosing the right mutual fund. There are many funds in the market, and the distributions each mutual fund produces will vary, as will their distribution schedules.
One of the better ways to search for mutual funds is with professional assistance. One such way would be to use a digital marketplace to compare the different deals you can get with mutual funds.
Boston Unisoft offers MF Trader, a professional venue for the world of mutual funds. Users enjoy speed and accessibility in their search for the right mutual fund investments. MF Trader contains an entire digital marketplace connecting mutual fund owners, brokers, fund houses, and individual investors.
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