How to Estimate the Annual Income From a Mutual Fund

You can estimate a mutual fund's income using historical data.

You can estimate a mutual fund's income using historical data.

Mutual funds offer a convenient way to invest. Each share you buy represents a part of a portfolio that may contain dozens or hundreds of different stocks, bonds or other investments. You would have to spend a small fortune in commissions to buy these investments individually. Your annual income from the mutual fund depends on the performance of the portfolio.

Mutual Fund Income

A mutual fund must distribute 95 percent of its investment earnings each year. In return for this requirement, mutual funds don’t have to shell out income tax. Instead, this delightful chore falls upon shareholders. Mutual fund investment earnings stem from dividends, interest and capital gains. Unless you hold your mutual fund shares in a tax-shielded account, such as an individual retirement account, you’ll have to fork over taxes on your income from the fund. You can estimate this income in advance. When you estimate your income, subtract the fund’s expense ratio listed on the mutual fund website.

Mutual Fund Yield

The annual yield of a mutual fund is the percentage return of interest or dividend income it has paid in out past years. The percentage return is the amount of interest or dividends you receive for each dollar you invest. As a general rule, mutual funds can't guarantee their returns, but many do try to provide consistent yields from year to year. You can estimate the current year’s yield by reviewing previous years’ yields. The mutual fund website will show this historical information. Estimate your interest or dividend income by multiplying your invested amount by your guesstimate of this year’s yield.

Capital Gains

A mutual fund manager may buy and sell securities in the fund’s portfolio. Whenever a fund sells a security, it creates a capital gain or loss. It distributes these gains and losses to you, the shareholder. Two factors come into your estimate of capital gains. The first is how much the shares will gain in price during the year. The second is the proportion of that increase that the fund will pay out as capital gains. You can review the mutual fund's history to get a rough idea of the ratio of annual capital gains distributions to price changes. Multiply this ratio by the amount you expect the fund price to increase in the upcoming year. This is your estimate for your capital gains income.

Tax Effects

If you hold your mutual fund in a taxable account, you will have to pay your normal tax rate on interest income. However, you pay long-term capital gains taxes on all capital gain distributions, no matter how long you've held the fund. You also pay the long-term capital gain rate on most, if not all, of your dividend income. As of 2013, the long-term capital gains rate ranges from 20 percent to 0 percent, depending on your gross income. Therefore, you’ll have a larger after-tax return from dividends and capital gains than from an equal amount of interest. However, the interest from municipal bond funds is normally tax-free.


About the Author

Based in Chicago, Eric Bank has been writing business-related articles since 1985, and science articles since 2010. His articles have appeared in "PC Magazine" and on numerous websites. He holds a B.S. in biology and an M.B.A. from New York University. He also holds an M.S. in finance from DePaul University.

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