What is Breakpoint
Breakpoint, for load mutual funds, is the dollar amount for the purchase of the fund's shares that qualifies the investor for a reduced sales charge. Breakpoints offer investors a discount for making larger investments. The purchase may either be made in a lump sum or by staggering payments within a specified period of time. The latter form of investment purchase in a fund must be documented by a Letter of Intent (LOI).
BREAKING DOWN Breakpoint
Breakpoints are set at various levels to offer investors a discount on sales charges when they make larger investments. Breakpoints are determined by the mutual fund and integrated within the fund distribution process. They are typically offered for funds with a front-end sales charge but may be available for other types of sales charges as well.
Mutual funds are required to give a description of breakpoints and eligibility requirements in the fund prospectus. By reaching or surpassing a breakpoint, an investor will face a lower sales charge and save money.
Breakpoint discounts often begin at $25,000. The Financial Industry Regulatory Authority (FINRA) provides the following example of a breakpoint discount schedule:
Investment and Sales Charge
Less than $25,000 5.00%
At least $25,000, but less than $50,000 4.25%
At least $50,000, but less than $100,000 3.75%
At least $100,000, but less than $250,000 3.25%
At least $250,000, but less than $500,000 2.75%
At least $500,000, but less than $1 million 2.00%
$1 million or more No sales charge
When a mutual fund offers breakpoint discounts, there are a few ways an investor can qualify. If an investor’s initial purchase reaches a breakpoint they can expect to receive the corresponding discount rate.
Given the FINRA breakpoint schedule, suppose that an investor plans to invest $100,000 in a front-end load mutual fund with a standard sales charge of 5.00%, or $5,000. Since the fund offers breakpoints, the investor’s front-end sales charge would be reduced to 3.25% or $3,250. The breakpoints help this investor to save $1,750 on the transaction.
Mutual funds also allow investors to qualify for breakpoints through Letters of Intent and rights of accumulation (ROA).
Letter of Intent
A Letter of Intent allows an investor to qualify for breakpoints by committing to an investment schedule over a period of time. A Letter of Intent is a formal document signed by the investor outlining their plans for investment in the fund. A LOI will typically allow for future investments to be considered over the next 13 months. With an LOI an investor can receive the sales charge breakpoint associated with their total investment.
For example, assume a new investor would like to make a $50,000 investment in a fund. The fund follows the sample fee schedule outlined above and has a standard sales charge of 5.00%. If the investor commits to making ten $5,000 payments over the next 13 months through a Letter of Intent then the investor will pay a 3.75% sales charge on each investment.
Rights of Accumulation
Rights of accumulation allow investors to pay sales charges based on their total investment in the fund. Assume the new investor from the example above would like to make additional investments after the Letter of Intent has expired. Any additional investments would incur a sales charge of 3.75% until the investor reaches the next breakpoint of $100,000.
In some cases, rights of accumulation may extend beyond just the targeted share class for investment. Investors should seek to have a clear understanding of a fund’s breakpoints and all qualifications to ensure they receive the greatest discount for which they are entitled.
For more on mutual fund breakpoints, see also Lower Your Fees with Mutual Fund Breakpoints.