Periodic Payment Plan

What Is a Periodic Payment Plan?

The term periodic payment plan refers to an investment plan where an individual makes small payments over time in order to invest in mutual fund shares. These plans involve making contributions of a small, fixed sum over a period of time.

People who invest in periodic payment plans actually own an interest in the plan's trust—not the shares of the fund. Periodic payment plans are often sold to military personnel but don't provide these investors with any special benefits.

Key Takeaways

  • A periodic payment plan is an investment plan that allows an individual to make small payments over time in order to invest in mutual fund shares.
  • People who invest in periodic payment plans own an interest in the plan's trust rather than shares in the fund.
  • Investors may pay higher fees than they would if they invested in fund shares, notably creation and sales charges, and service fees to the plan's custodian.

How Periodic Payment Plans Work

Mutual funds collect money from a large number of investors and invest that capital in a variety of assets including stocks, bonds, and other securities. These funds are overseen by money managers who allocate assets at regular intervals to help the fund stick to its investment objectives.

A mutual fund can give investors exposure to many different securities, allowing them to diversify their holdings at a much lower price than they would pay if they invested in each asset individually.

Most mutual funds have a minimum investment requirement. In these cases, investors are usually required to put down an initial deposit amount in order to begin investing in the fund. After meeting these minimums, investors are able to put down smaller amounts toward their account. But there are some funds that offer concessions to certain investors who can't meet these minimum requirements.

Periodic payment plans are contracts that allow certain investors a chance to invest in mutual funds at a much lower price—without having to meet minimum investment thresholds. These plans are also called contractual plans or systematic investment plans (SIPs).

As noted above, these plans are generally offered to military personnel. They are able to contribute a small, fixed sum over a period of usually 10, 15, or 25 years. In exchange for these payments, the investor owns an interest in a plan trust—which invests in a mutual fund—rather than the shares themselves. The trust invests in a mutual fund. Most plans allow an investor to start a plan for a modest sum of money, such as $50 per month. Those who take part in these plans receive periodic payment plan certificates.

A periodic payment plan certificate is a document that represents your ownership interest in the fund.

The plan trust's sponsor makes money by charging a creation and sales charge, which most investors know as a front-end load. This sales charge can be as high as 50% of the first 12 months' worth of payments. This can make a periodic payment plan a potentially expensive investment option, especially for those who do not remain invested for the full length of the plan.

Periodic payment plan investors may also pay service fees to the plan's custodian. This entity is responsible for safekeeping the plan's assets and to maintain its records. Some plans also require investors to pay a custodian fee—a monthly fee to process each payment under the plan. Other fees may include:

Special Considerations

Investors may be able to get a better deal by purchasing mutual fund shares directly. While the low required monthly contribution may be a selling point of a periodic payment plan, some brokerage companies, whose fees may be lower than that of a periodic payment plan, often allow investors to make small monthly investments and avoid large minimum investments if they establish automatic deposits.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Periodic Payment Plans." Accessed Nov. 17, 2020.

  2. United States Code. "15 USC §80a–2(a)(27)." Accessed Nov. 17, 2020.

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