What is a capital gain distribution?

A capital gain distribution refers to the payment made to shareholders from the profits a fund realizes from selling securities that have appreciated in value. When a mutual fund or similar investment vehicle sells assets at a profit, the profits must be distributed to shareholders as dividends. Specifically, these distributions come from long-term capital gains, which are profits from the sale of assets held for longer than a year.

This form of income is distinguished from other types of distributions, such as ordinary dividends, which are typically generated from the income earned by a fund's investments in dividend-paying stocks and other income-producing assets. Unlike refunds or payments for services rendered, which do not pertain to investment profits, a capital gain distribution is explicitly linked to the growth of investment value over time, reflecting the fund's overall performance and the capital gains it has realized on behalf of its shareholders.