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Know Your Mutual Fund’s Breakpoints

If you are like most other Americans that are saving for retirement, then at least a portion of your portfolio is invested in mutual funds. In most cases, this means that you are probably paying some sort of sales charge for your investment. This fee can range anywhere from 2 or 3 percent up to 8.25%, the legal limit for mutual fund sales charges. The average mutual fund company assesses sales charges ranging from approximately 4.25% to 5.75%. However, fund companies are required to offer volume discounts to their shareholders that allow them to pay less for larger dollar investments. These discounts, called breakpoints, are designed to entice investors into purchasing larger share amounts. A hypothetical schedule of breakpoints is shown below:

$0-25,000 – 5.75% sales charge

$25,000 – $50,000 – 5.25% sales charge

$50,000 – $100,000 – 4.75% sales charge

$100,000 – $250,000 – 3.75% sales charge

$250,000 – $500,000 – 3% sales charge

$500,000 – $1,000,000 – 2% sales charge

$1,000,000 and up – sales charge is waived

This hypothetical schedule shows a fairly typical breakpoint schedule for the average mutual fund company. A key issue to remember here is that breakpoints are offered within a single fund family’s entire selection of funds, so an investor who constructs a portfolio of funds within a single company will be eligible for all breakpoint discounts. For example, if someone invests $100,000, $25,000, $150,000 and $50,000 with four different funds offered by the same fund company, then the investor would be entitled to a breakpoint reducing the sales charge to 3%, according to the hypothetical schedule listed above. Therefore, investors must take this issue into account when choosing between various mutual funds to invest in. While cost is obviously not the only issue to consider, it should be taken into account in determining how to allocate one’s portfolio. If an investor wishes to invest in a selection of funds from different fund families, then the portfolio’s expected performance must be enough to offset the higher sales charges that will be assessed versus what the would be paid if the portfolio choices were limited to a single fund family.

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