A mutual fund may make money in two ways:
by earning dividends or interest on its investments and by selling
investments that have increased in price. The fund distributes,
or pays out, its profits (minus fees and expenses) to you and
its other investors on a regular schedule.
Income distributions are paid from the income
the fund earns on its investments.
Capital
gain distributions
are paid from any profits the fund
realizes from selling investments.
A fund may sell investments for a number
of reasons:
To capitalize on an investment's increased value
To achieve performance targets
To free up money to make new investments
To prevent additional losses in a security that is losing value
To have enough cash to redeem shares its investors want to sell back to the fund
You may also make money by selling your shares
for more than you paid to buy them if the fund's price per
share increases.
Market timing When a fund imposes a redemption fee on the sale of shares that have been recently purchased, it's attempting to limit the number of transactions and the related expenses of rapid, in-and-out buying and selling.
