Investment Companies - Breakpoints

A mutual fund company's scale of declining sales charges based on the amount invested is called the fund's breakpoint schedule. One of the two breakpoint schedules below must be used in order for a fund to charge the maximum 8.5% sales charge:

1. Amount Purchased Sales Charge Percentage
$0-$10,000 8.5%
$10,001-$25,000 7.75%
$25,001 or more 6.25%

2. Amount Purchased Sales Charge Percentage
$0-$15,000 8.5%
$15,001-$25,000 7.50%
$25,001 or more 6.25%

Below is an example of a breakpoint schedule for Mutual Fund Company A:

Investment amount Sales charge as a % of offering price
Less than $25,000 5.75%
$25,000 but less than $50,000 5.00%
$50,000 but less than $100,000 4.50%
$100,000 but less than $250,000 3.50%
$250,000 but less than $500,000 2.50%
$500,000 but less than $750,000 2.00%
$750,000 but less than $1 million 1.50%
$1 million or more and certain other investments none

An investor might qualify for these breakpoints in several ways. For example, the investor might add a larger lump sum to the purchase to meet a breakpoint level, thereby reducing the sales charge by as much as 1% or more. Note that for the purposes of breakpoint qualification, married couples, parents and their minor children, and corporations count as single investors.

Two other incentives offered by mutual fund companies to allow investors to continue investing and qualifying for breakpoints include letters of intent and rights of accumulation.

  • Letters of Intent (LOI): You will often come across clients who may not have enough money at present to qualify for a fund's breakpoint schedule, but who will have access to more money to invest in the future. In order to decrease the sales charge on the present fund purchase, the investor can agree to invest the additional funds necessary to reach the breakpoint within 13 months by signing a letter of intent.

The customer must complete the additional investment to qualify for the reduced sales charge. The fund family will hold the extra shares in escrow, and the investor must deposit the additional money to complete the LOI. If the customer has not completed the investment amount within the 13 months, he or she can make up the difference in sales charges by either redeeming escrowed shares or paying by check. Appreciation and reinvested dividends do not count toward the LOI.

  • Rights of Accumulation (ROA): Rights of accumulation allow the investor to qualify for a reduced sales charge on a new purchase by using prior share appreciation to qualify for breakpoints without any time limits. The mutual fund company will usually allow the investor to take into account the current value of existing holdings in any class of shares, including funds held in other types of products, such as variable annuities and variable life products.

Exchanges within Fund Families
Exchange privileges within a mutual fund family allow the investor to convert holdings in one fund for an equal investment amount in another fund within the same family without incurring a sales charge. Not all fund families allow this privilege, and some limit exchanges according to the total fund value of the shareholder's current holdings or the number of exchanges per year. This information is contained in the mutual fund prospectus.

When an investor decides to exchange funds within the same share class, there are no sales charges for the service. However, exchanges have the same tax consequences as ordinary sales and purchases. That is, any gains will be taxable and any losses may be used against other gains.

Buying and Redeeming Mutual Funds
Related Articles
  1. Economics

    Explaining Like-for-Like Sales

    Companies use like-for-like sales figures to compare sales volume from one period to another.
  2. Credit & Loans

    Explaining Leveraged Loans

    Leveraged loans are loans extended to companies or people who already have large amounts of debt.
  3. Investing

    What a Fed Delay Means for the ECB & BoJ

    The Fed’s continued delay has repercussions for more than just the U.S. economy and markets. The ECB and the BoJ may support the case for stocks in Europe.
  4. Economics

    Who is a Lessor?

    A lessor is the owner of an asset that is leased.
  5. Economics

    Understanding Income Inequality

    Income inequality refers to the uneven distribution of income across a single economy.
  6. Investing

    2 Common Ways to Misuse Target Date Funds

    The world of asset classes is just as complicated as taking vitamins. How much should you take of small caps? Intermediate bonds? Emerging market stocks?
  7. Term

    Understanding Short Covering

    Short covering is buying back borrowed securities to close an open short position.
  8. Economics

    Who is a Hawk?

    In the economic sense of the word, a hawk is someone who believes high interest rates should be maintained to keep inflation low.
  9. Economics

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  10. Term

    What's a Sector?

    The term sector has several applications in economics and finance.
  1. Unicorn

    In the world of business, a unicorn is a company, usually a start-up ...
  2. Private Equity Real Estate

    A Definition of "Private Equity Real Estate" and how it applies ...
  3. Put-Call Parity

    A principle that defines the relationship between the price of ...
  4. Encumbrance

    A claim against a property by a party that is not the owner. ...
  5. EBITA

    Earnings before interest, taxes and amortization. To calculate ...
  6. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
  1. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  2. Can working capital be negative?

    Working capital can be negative if a company's current assets are less than its current liabilities. Working capital is calculated ... Read Full Answer >>
  3. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  4. Are Cafeteria plans taxable?

    Whether the benefits you receive through your employer-sponsored cafeteria plan are taxable depends entirely on which benefits ... Read Full Answer >>
  5. Can mutual funds only hold stocks?

    There are some types of mutual funds, called stock funds or equity funds, which hold only stocks. However, there are a number ... Read Full Answer >>
  6. How do mutual funds compound interest?

    The magic of compound interest can be summed up as the concept of interest making interest. On the other hand, simple interest ... Read Full Answer >>
Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!