By law, mutual funds have to distribute a minimum of 90% of the money they receive in dividends (stock dividends) and the profit they make by selling shares they own (capital gains). The stock dividends and capital gains are collectively know as distributions. This means that even if your mutual fund's NAV drops, you may still get distributions. And distributions are taxable.

Mutual fund tax calculations are a bit trickier than those of stocks so it is even more critical that you keep good records of not only your purchases and sales of funds, but also the distributions you get from your fund.