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Step 1
First, it is important to understand that mutual fund breakpoints typically relate to Class A Share mutual funds. When you purchase a Class A mutual fund, you will pay a sales commission charge, commonly referred to as a front-end load. For instance, if you want to purchase $10,000 and the upfront sales charge is 5.25%, then you will pay $525 out of the $10,000 to buy into the fund. This sales charge will apply each time you add new money to the fund, however it is not an annual charge.
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Step 2
Mutual fund breakpoints are discounts on the front end sales charge. For example, if you invest $20,000 in Fund XYZ Class A, you will pay an upfront cost of 5.25%, but if you invest $100,000 into Fund XYZ Class A, you will pay 3.50%. Think of this as if it is a volume discount at the grocery store. If you buy 24 rolls of toilet paper, the cost per roll will be less than if you buy 4 rolls of the exact same kind of toilet paper.
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Step 3
Now, also realize that the mutual fund breakpoints apply to an entire family of mutual funds. So, if you buy the Bozo Fund Family Bond Fund and the Bozo Fund Family Stock Fund, your purchases will be added together for breakpoint calculations. Some fund families begin their breakpoint discounts at $25,000 but most start at $50,000 or more. You will need to check with your financial institution to get the breakpoint information for your particular fund family. It is common to have one upfront sales charge for $50,000 to $100,000, then a lower sales charge for $100,000 to $250,000, and it continues to get lower as your total purchases go higher.
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Step 4
It is important for you to know as well that the mutual fund breakpoints, in most cases, are based on the total amount you have purchased, not your current market value. For example, let's say you purchased $40,000 of your fund one year ago and the value has now dropped to $30,000. If you purchase another $10,000, most fund companies will honor your breakpoint as $50,000, not view it as your current value plus $10,000 ($40,000).
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Step 5
Also, please be aware that there are policies for what is called a "Letter of Intent". Again, you will want to speak with your financial institution about your specific fund family, but a letter of intent will give you a discount today based on your acknowledgement that you will purchase more over the next 13 months. For instance, you purchase $25,000 today and commit to purchasing another $25,000 in 6 months. In this case, you will be eligible for the $50,000 mutual fund breakpoint on both purchases.
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Step 6
Lastly, note that there is also a policy for what is referred to as "Rights of Accumulation". Rights of Accumulation refers to the information in Step 4 and states that your purchases are aggregated together over time, as you accumulate shares and value in the fund family. If you currently own $110,000 of a fund and you purchase another $20,000, then you will pay the sales charge based on $130,000 even though you are only investing $20,000 this time.
