How do mutual funds generate profits

Mutual Fund investing allows investors to profit from either Capital Gains or Dividend Income. A capital gain is the profit obtained from selling an asset for more than its cost. The fact that capital gains are only realized when the mutual fund units are redeemed, however, must not be overlooked. As a result, mutual fund capital gains tax is only owed at redemption. Consequently, the tax on the redemption of mutual funds must be paid at the time the income tax returns for the next fiscal year are filed.

Dividends are another method by which investors in mutual funds can get income from their investments. Dividends are declared by the mutual fund based on its total distributable surplus. Dividends are paid out at the fund’s discretion to investors and are immediately taxable. Investors must therefore pay taxes on dividends they get from their mutual funds.