You can earn money from your mutual fund investment in three ways. First, a fund may receive income in the form of dividends and interest on the securities it owns. A fund will pay its shareholders nearly all of the income it has earned in the form of dividends.

Second, the price of the securities a fund owns may increase—this is known as capital appreciation. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains to investors.

Third, if a fund does not sell but, instead, holds on to securities that have increased in price, the value of its shares (NAV) increases.The higher NAV reflects the higher value of your investment. If you sell your shares, you make a profit (and this is also a capital gain).

Usually funds will give you a choice: the fund can send you the distributions (capital gains and dividends), or you can have them re-invested in the fund to buy more shares, often without paying an additional sales load.