Breakpoint Considerations for Your Mutual Fund

Understanding how a breakpoint works for a mutual fund could help you save a significant amount of money. Here are the basics of breakpoints and how they affect you as an investor.

What Are Breakpoints?

There are front-end fees associated with buying into a mutual fund. Investment brokers make their money through these sales charges. For each dollar that you put into the fund, a certain percentage will be given to the introducing broker. This represents an incentive for the broker to sell a particular fund to his or her clients.

A breakpoint is a point at which the sales fee is reduced. This could be caused by reaching a certain dollar figure or a particular amount of shares in the fund. As an investor, you will want to be aware of breakpoints because surpassing them can save you substantial amounts of money over the long-term.

More Money Equals a Bigger Break

Essentially, this means that the more money you can invest in a mutual fund, the more money you can save on fees. Saving in fees on the front end could mean a substantial amount of money over the long-term when this is compounded with interest. Therefore, you will want to make sure that you invest as much as possible at one time in order to save on the front-end fees.

For example, let's say you had $1000 to invest. When you used this $1000, your broker might charge you 5 or 6 percent in fees. By comparison, let's say you had $100,000 to invest. At that point, the initial fee might fall to 2 percent. If you had $1 million or more to invest, the fees might be eliminated completely. Therefore, the more money that you can come up with to invest, the more of your money you get to keep and earn interest on.

Things to Consider

As an investor, you will want to be aware of breakpoints before you buy into a mutual fund. Ask your broker where the breakpoint falls and how much you have to invest to take advantage of it.

With this in mind, it may be to your advantage to put all of your money into one particular family of funds. All of the big mutual fund providers typically have a variety of funds to choose from. Therefore, you can diversify your holdings through several different funds while paying only the one figure for commission. If the amount that you invest in all of your mutual funds is great enough, you could be able to take advantage of a breakpoint.

You will also want to remember that a breakpoint does not necessarily have to be based only on your money. For example, if you and several members of your family all wanted to invest in a particular mutual fund, you could get the broker to allow you to count all of it towards one breakpoint. This can allow those with smaller amounts of money to invest to take advantage of a mutual fund breakpoint.

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