Question about Capital Gains Distributions in Open End Funds

Am I interpreting this correctly?

Quoted from Series 66, 2.3.2
When a fund makes a dividend or capital gains distribution, the value of the fund will fall. Remember, the NAV represents the total value of assets in the fund. If the fund releases a bunch of cash to investors, there will be less money in the fund and the NAV will drop. Most investors reinvest their mutual fund income, which will then provide them with more shares. Dividend and interest distributions occur frequently, but capital gains distributions may only occur once per year.

My question is regarding the last sentence: “Capital gains distributions may only occur once per year.”
I’m guessing this means that the fund manager will buy and sell a number of securities in the fund throughout the year, and the overall realized capital gains amount for the year, for all the securities sold will then be distributed to all of the investors. Am I interpreting this correctly?

What happens if, after a year, the fund has more capital losses than gains? Can the investors use those losses to count against capital gains from other investments?

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Your interpretation is correct - if the fund has net capital gains at the end of the year, they will likely distribute most of those capital gains to investors to take advantage of Subchapter M (the conduit rule). However, the fund may not distribute losses if there are net capital losses. Essentially, the fund can use the losses itself to offset gains and/or to roll into subsequent years, but they cannot distribute them to shareholders.

This is a key test point. There’s one primary investment that can do this - limited partnerships. It’s safe to assume all other investment prodcuts on this exam (e.g. mutual funds, ETFs, hedge funds, etc.) cannot pass through losses.


Thanks. That makes sense, and I do remember reading about that now that you mention it!

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