How do bond mutual funds generate capital gains distributions?
The prices of bonds held in a bond mutual fund’s portfolio may fluctuate as a result of changes in prevailing interest rates and the issuers’ creditworthiness. When a fund sells bonds whose prices have changed, the sales generate capital gains or losses. When gains from these sales exceed losses, they are distributed to shareholders as capital gains distributions. These distributions can be paid out in cash or reinvested in the fund. When losses exceed gains, the bond mutual fund’s share price will decline.
