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b. Discuss the different ways an investor can realize a return on a mutual fund investment....

b. Discuss the different ways an investor can realize a return on a mutual fund investment. (5 points)

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Answer #1

Investors typically earn a return from a mutual fund in three ways:

  1. Income is earned from dividends on stocks and interest on bonds held in the fund's portfolio. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. Funds often give investors a choice either to receive a check for distributions or to reinvest the earnings and get more shares.
  2. If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
  3. If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit in the market.
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