The mutual fund manager buys and sells stocks and bonds
continually, in response both to changing market conditions
and to the flow of money into or out of the fund. When the
manager sells a stock or bond at a higher price than he paid
in Mutual Funds
for it, the difference is a kind of profit known as a capital
gain. As with dividends, the capital gains received by a mutual
fund are distributed to owners of the fund, usually in the
form of additional fund shares.
When tax time arrives, the Internal Revenue Service calls for
varying treatments for the different kinds of profit you make
when you own a mutual fund. Read Chapter 9 for a detailed
explanation of how to pay the right amount of taxes — and
no more — on the growth of your mutual fund investments.