Typically, mutual funds distribute capital gains, interest and/or dividends to their shareholders. Specifically, they may earn income from interest on bond holdings and dividends on company shares. They may also earn capital gains when fund managers sell securities within the portfolio for more than they paid for them.
When a mutual fund earns income or capital gains, it passes these earnings to the investor by making what is called a distribution.
Investors may choose to directly deposit distributions into their bank account or have them reinvested in additional fund units without charge. Distributions in registered plans are always reinvested.
Depending on the fund, distributions may be paid monthly, quarterly, semi-annually or annually.