The dividends and interest earned by a mutual fund on its investments are the fund's income.  The income is distributed to shareholders quarterly (March, June, September and December).

When a fund sells an investment security for a higher price than originally paid, the fund has a capital gain.A capital loss is realized when the fund sells an investment security for a lower price than originally paid. If the investment security is held by the fund for more than one year, the gain or loss will be a long-term capital gain or loss.  Most capital gains are distributed in December.

When the investment security is held by the fund for less than one year, the gain or loss will be a short-term capital gain or loss. Mutual fund gains and losses are netted together and when the fund has a net gain, that gain is usually distributed to the share holder once a year (November or December). By law, mutual funds must pay out income and realized capital gains to share-holders. These distributions are taken from the fund's assets which is why the net asset value is reduced by the same amount as the distribution.