Interest / Capital Gains / Dividends

Mutual funds have several ways to make money for their investors: share price increase, interest, capital gains and dividends. Share price appreciation occurs just like in a stock price. Mutual fund shares have the same supply and demand considerations as do stock shares. A demand for a Fund's shares increases their price. A mutual fund is nothing more than a company that invests in assets. If they choose assets well, the value of the fund will increase and become more desirable...fewer shareholders will want to sell and more investors will want to buy. Share price will increase.

Interest, captital gains and dividends (ICD) must be distributed to the Fund's investors or the fund risks taxation on these monies. The magic number is 98%. 98% of the ICD must be distributed or the government will take a share as well. The other 2% is generally the expense ratio of the fund and pays for advisor and legal fees, 12b-1 distribution costs, and other costs associated with running the fund.

Interest distributions within the fund are as a result of the fund's investing in securities and money market accounts that issue interest. Such securities would be corporate and municiple bonds,

treasury bills and certificates of deposit.

Capital gains are distributions within the fund from sales of securities such as stocks and bonds that appreciated in value and then were sold. The difference between the bought and sold prices of the securities is the capital gain and is distributed to the mutual fund shareholders on a per share basis.

Dividends are like interest distributions. Some securities held by the fund issued dividends periodically. These are then passed on to the shareholders. Income funds try to maximize the interest and dividend distributions.