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EARNING MONEY WITH MUTUAL FUNDS

What is Net Asset Value?

Net Asset Value (NAV) is the value of one share in a fund. When you buy shares, you pay the current NAV per share, plus any sales charge (also called a sales load). When you sell your shares, the fund will pay you NAV less any other sales load. A fund's NAV goes up or down daily as its holdings change in value.

Example: You invest $1,000 in a mutual fund with an NAV of $10.00. You will therefore own 100 shares of the fund. If the NAV drops to $9.00 (because the value of the fund's portfolio has dropped), you will still own 100 shares, but your investment is now worth $900. If the NAV goes up to $11.00, your investment is worth $1,100. (This example assumes no sales charge.)

How Funds Can Earn You Money

You can earn money from your investment in three ways:

  • First - A fund may receive income in the form of dividends and interest on the securities it owns. A fund will pay its shareholders nearly all of the income it has earned in the form of dividends.
  • Second - The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.
  • Third - If a fund does not sell but holds on to securities that have increased in price, the value of its shares (NAV) increases. The higher NAV reflects the higher value of your investment. If you sell your shares, you make a profit (this also is a capital gain).

Usually funds will give you a choice: the fund can send you payment for distributions and dividends, or you can have them reinvested in the fund to buy more shares, often without paying an additional sales load.

Taxes

You will owe taxes on any distributions and dividends in the year you receive them (or reinvest them). You will also owe taxes on any capital gains you receive when you sell your shares. Keep your account statements in order to figure out your taxes at the end of the year.

If you invest in a tax-exempt fund (such as a municipal bond fund), some or all of your dividends will be exempt from federal (and sometimes state and local) income tax. You will, however, owe taxes on any capital gains.