Income. A fund's income payout, or yield, tends to interest those investors who need regular income, because they don't necessarily have to tap into their principal for their day-to-day living expenses. Savings accounts and cds pay income, but so do most bonds and some stocks. If you own a mutual fund that buys income-paying stocks or bonds, the manager passes on any income to shareholders (after taking expenses off the top, of course).
Yield can be calculated in a variety of ways. Morningstar calculates this figure by summing the income distributions over the trailing 12 months and dividing that by the sum of the last month's ending NAV plus any capital gains distributed over the 12-month period. (See more on capital gains distributions later in this lesson.)
Capital Appreciation. The second key way you can gain from a fund is through capital appreciation—that is, if one or more of your fund's holdings is selling for a higher price than it was when the manager purchased it. If the manager sells the new, pricier stock or bond, the fund realizes what is called a capital gain. And even if the manager simply hangs on to the stock or bond that has gained in value, the fund will enjoy capital appreciation; in other words, its NAV will increase. That's because the NAV is a reflection of the value of all of the securities in a fund at a given point in time.