A mutual fund's price (net asset value ) will drop on the record date by the amount of the distribution. In our example, one share of Fidelity Select Electronics Fund was worth $37.65 the day before the record date. The instant the stock market opened on the record date, its per-share value dropped by the amount of the distribution, i.e., $6.95. Nobody has gained or lost money. Some of the share's value has been converted to cash. One share is now worth $30.70 plus $6.95 in cash. (During the day, the stocks and bonds that Fidelity Select Electronics owned did decrease 3.6% in value, but this is unrelated to the distribution.)
The shareholder owes taxes on the distribution. The long-term capital gains are taxed at the long-term capital gains rate while short-term capital gains and dividends are taxed as ordinary income.