Investments made within a mutual fund pay dividends and earn capital gains.  Mutual funds declare dividends and capital gain distributions at certain times during the year. Dividend distributions (income distributions) are generally paid quarterly, capital gains distributions once a year usually at year end. These distributions are taxable. Unlike dividends from individual securities which are taxed in the year dividends are paid, mutual fund distributions declared as payable to shareholders of record in October, November or December and paid in January of the following year are taxable to shareholders based on the record date, not the payment date. Depending upon the time you purchase or sell a mutual fund you may receive a distribution of dividends and/or gains associated with those shares.  

Refer to IRS Publication 564, Mutual Fund Distributions, Publication 550, Investment Income and Expenses, and consult your tax advisor for guidance in this area.

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.