Final answer:
Capital gains distributions in closed-end mutual funds are profits received by investors when the fund sells securities at a higher price than their purchase price, paid out annually and subject to tax.
Step-by-step explanation:
Investors in closed-end mutual funds receive capital gains distributions as a return on their investment when the fund's overall performance yields a profit from selling securities at a price higher than their purchase price. These capital gains are typically paid out annually to fund shareholders and can be taken as cash or be reinvested to purchase additional shares of the mutual fund. It is important to note that capital gains distributions are subject to capital gains tax. As the trend of investing in mutual funds continues to grow, with over 47% of U.S. households invested in mutual funds as of 2021, understanding the ins and outs of capital distributions becomes essential for financial investors with retirement savings or pension money involved in these investment vehicles.