I opened my first mutual fund a few months ago. This wasn't so much for investment purposes as it was for me better understand how funds work and get a feel for things. Because of that I've been tracking it really closely.Since I first invested in the fund it had a NAV ranging from $13-13.80ish. It obviously fluxuates, but it had been showing fairly steady growth. Earlier this week the NAV Dropped to mid $11 and these show up in my transaction history:Dec 18, 2007 Capital Gain Reinvested $63.16 Dec 18, 2007 Capital Gain Payment $29.81 Dec 18, 2007 Dividend reinvestment $12.28 Dividend reinvestment I get. What exactly is the capital gain payment and reinvestment. My thought was that they sold some shares of something and bought something else that was cheaper, but I'm new at this and I know there are people out there who get this better than i do.

Mutual funds are required to make annual distributions for dividends and capital gains. These are normally reinvested in your account as additional shares. The distributions are what causes the drop in NAV. To evaluate fund performance, look at total return, not NAV. See www.mfea.com for general info on mutual funds.

It means they reinvested some of your capital gains and sent you some as cash. Could be short term and long term gains. They did not sell anything. You're going to have to declare dividends and capital gains on your taxes.You can option to have gains and dividends all reinvested, all sent to you or a mix of both.http://www.investorwords.com/706/capital_gain.htmlcapital gain DefinitionThe amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain. For most investments sold at a profit, including mutual funds, bonds, options, collectibles, homes, and businesses, the IRS is owed money called capital gains tax. opposite of capital loss.

At the end of the year, a certain percentage of capital gains are distributed to all shareholders accounts...just like any dividends gained. If you're new to this it looks scary at first, but your account will be adjusted in a day or two...and your overall " balance" will be just about the same...but you will have more shares at a lower NAV ...that's a good thing...in the future, when your fund gains 37 cents per share one day ...YOU have more shares...You have 37 cents for each additional share...you are simply making more than you would have two weeks ago.If you really want to see the real advantage, you have to do a little math. Your " cost" has not changed, but you have more shares...so you should divide the original cost by your new number of shares...your average " cost-per-share" has gone down! Year after year that happens...there will come a time when you have as many " cost free" shares as the ones you purchased.... it's why funds are a long-term investment. I have one fund ,FNMIX ,that distributes monthly and it really shows when you see it every month...it started with about 2 shares added every month...then 3.5...the 6... now it's adding over 14 shares a month..... have gone well beyond my purchase amount. ( 100% plus gain )Just something for you to look forward to.

Your mutual fund sold some stock during the year. So you will have to pay taxes on your capital gain.Oh! You will also have to pay taxes on your dividend as well.

Your mutual fund is really a big collection of many different stocks. As stocks go up and down, and companies do better or worse, the mutual fund manager will choose to sell some of the stocks and buy others. This is one of the really good things about a mutual fund. Someone else is choosing what to buy and sell and when. You just own a certain piece of the giant mutual fund pie.So when your fund manager sells a stock that has gone up, your mutual fund will make a little bit of money. And not just on paper. The manager has actually sold some of the funds stock, so the "gains" have been "realized" - meaning the increase is real. Because you own shares of the mutual fund, some of that money is yours. They pay it to you in the form of a "capital gains payment."You've chosen (wisely, I think) to just reinvest that money right back into your mutual fund. Most people do it this way. So you're actually buying a few more shares of your mutual fund with the money that you've made. That is your "capital gains reinvestment."Similarly, some stocks will pay their stockholders "dividends". Clearly, one (or more) of the stocks that are in your mutual fund have made dividend payments, and your share of those have gone into your account, and you've reinvested it.At the end of the year, by the way, you will need to pay taxes on this money. The mutual fund company will send you a form showing you how much you've made. Understand, this is NOT paper earnings, where the value per share of your mutual fund has gone up and down (from $13 to $14, say) but the real money that they have added into your account that you have chosen to reinvest.Good for you for opening up a mutual fund account. It's a great way to learn about saving and investment.