Funds, Capital Gains, and Income Mutual funds can cause tax headaches because investors have no control over when and how much their funds realize in gains. Fund managers buy and sell securities for fund investors, often without taking tax considerations into account. Mutual funds must pass along to their shareholders substantially all of realized capital gains that are not offset by realized losses by the end of their accounting year. Conversely, they realize losses anytime they sell a security for less than the purchase price. If gains outweigh losses, the managers distribute the difference to fund shareholders.
Funds also distribute any income that their securities generate.
Obviously, a fixed-income fund that owns bonds will be paying out lots of income, and a stock fund that owns stocks that pay out regular dividends will also pass along those. When paying out capital gains or income, funds send out checks for the distribution amount multiplied by the number of shares that you own. Or, if you choose to reinvest all distributions, the fund will instead use the money to buy more shares of the fund. After the distribution is made, the fund's NAV will drop by the same amount as the distribution. Fund companies often make capital-gains distributions in November and December, but they can happen any time during the year.