The fund manager sold some of the individual stocks within the fund at a higher price than when they were originally purchased. It's called a capital gains distribution. You also could have earned dividends on the stocks within the fund. Both the capital gains distributions and the dividends are taxable income to you. They will show up on the Form 1099-DIV. The only way to take advantage of the $35K loss would be to sell the mutual fund shares and claim a loss.
Note that you have an option to reinvest the dividends and capital gains distributions by automatically purchasing additional mutual fund shares, or you can take the income as cash. But, in either case, it is still taxable income.
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