How Mutual Funds Work

A mutual fund is both an investment and an actual company. A mutual fund shareholder is buying partial ownership of the mutual fund company and its assets. That’s typically why mutual fund investors are also called shareholders. Shareholders typically earn a return from a mutual fund in three ways:

▪ 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 shareholders a choice either to receive a check for distributions or to reinvest the earnings and get more shares. ▪ If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to shareholders in a distribution. ▪ 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. N.B.: only the second way is available for funds operated on Nest Egg Network