If you invest in funds, there’s a good chance you’ll receive capital gain distributions. And if these funds hold fixed income or dividend-paying securities, dividend distributions also come into play. Gains and dividends are typically welcome outcomes (after all, people don’t invest with the goal of losing money). But they can also raise important questions: How are they calculated? Why do they occur when they do? And, most importantly, what are their tax implications? Let’s unpack why fund managers make distributions, so you can better understand their impact on your portfolio — and how to plan accordingly. What Are Capital Gains Distributions? When you invest in a fund (such as a mutual fund or ETF), it’s important to understand capital gains from two perspectives: Your portfolio The fund’s portfolio You’re likely familiar with the former. If you hold a fund in your portfolio and sell shares for more than what you paid, you “realize” gains and incur taxes on the profit. It’s the latter perspective that investors often overlook (and where capital gain distributions originate). Mutual funds and ETFs are pooled investment vehicles, meaning they