Yield High Capital Gains Distributions

Capital gains refers to the profits realized by a mutual fund when it sells its securities (for example, stocks or bonds). Capital gains distribution is the payment of the profits to mutual fund shareholders. Capital gains distribution usually happens once a year, although it may occur monthly with some types of bond funds. If you want to yield high capital gains distributions, you must invest for either a long period of time, or choose riskier investments that will yield higher gains.

Understand How to Yield High Capital Gains Distributions

Invest in mutual funds with the lowest possible fees and expenses.

Choose mutual funds with the highest risk you can afford, considering your risk tolerance.

Invest as much as you can afford. Higher investments yield higher gains distributions.

Set a limit on how much you can lose before you sell, for example, 25%. So if you invest when shares are $20, you sell if they drop to $15. If shares go up to $32, you sell if they drop to $24.

Avoid selling while your mutual funds shares are increasing, and reinvest the money you make during this time.

Tips & Warnings

• Capital gains distributions are taxable income, so you may want to consider automatic reinvestment of your capital gains into your mutual fund to avoid paying capital gains tax.
• Capital gains distributions are dependent on the mutual fund's performance: the better the fund does, the higher the gains you'll yield.
• Keep your tax advisor in the loop. Investing in mutual funds can have significant tax consequences. Make sure your tax planner knows about the investments you plan to make.
• Know that fund expenses affect your bottom line. Fund expenses dilute your returns in ways that can add up significantly over time. Calculate the effect of expenses to get a true picture of a mutual fund's performance.
• High capital gains distributions mean high taxes. Be prepared for the government to take its share of your gains.
• Riskier investments may pay off a great deal more than, say, index funds, but you may lose your entire investment. Don't invest more money than you can afford to lose.
• As an investor, you aren't really in control of the capital gains distributions. All you can do is invest wisely and hope that your intelligent investing will yield high results.

By ehow.com