Let's say you invested $10,000 in XYZ Fund at $10 a share in 1996. So you had 1,000 shares of the fund to start. Now, let's say that in 1997 XYZ made a capital gains distribution of $2 a share. You received a payment of $2,000 ($2 x 1,000 shares), either in cash or, more likely, in new shares of the fund (since most fund owners reinvest their gains).

In addition, when the distribution was paid, your fund company reduced the market price of the fund's shares to reflect it. To simplify the example, assume the market price of the fund--the net asset value, or NAV--was $12.50 a share when the distribution was paid. A distribution of $2 a share would have reduced the fund price to $10.50 a share.