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Mutual funds offer returns on their investors’ returns in two forms: dividends and capital gains. Dividends are paid out when the company makes profits (if any). If the company has performed really well and is left with surplus cash, it may decide to share the same with investors in the form of dividends. Thus, dividends are rolled out to investors proportional to the number of mutual fund units held by them. A capital gain is the profit earned by investors if the selling price of the security held by them is greater than the purchase price. Both dividends and capital gains from mutual funds are taxable.