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James Chen, CMT is an expert trader, investment adviser, and global market strategist.
Updated April 14, 2022 Reviewed by Reviewed by Thomas BrockThomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.
A breakpoint is the dollar amount for the purchase of a load mutual 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).
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 their prospectuses. 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:
| Sample Breakpoint Schedule Class A Shares (Front-end Sales Load) | |
|---|---|
| Investment | Sales Charge |
| Less than $25,000 | 5.0% |
| 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 | 2.0% |
| $1 million or more | 0.0% |
Suppose that an investor plans to invest $100,000 in a front-end load mutual fund that carries a standard sales charge of 5.0%, or $5,000, and offers breakpoints. Based on the FINRA's breakpoint schedule, the investor’s front-end sales charge would be reduced to 3.25% or $3,250. In other words, this investor is able to save $1,750 on the transaction.
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.
Mutual funds also allow investors to qualify for breakpoints through letters of intent (LOI) and rights of accumulation (ROA).
A LOI, a formal document signed by the investor outlining their plans for investment in the fund, enables an investor to qualify for breakpoints by committing to an investment schedule over a period of time. Typically, a LOI will allow for future investments to be considered over the next 13 months.
For example, assume a new investor would like to make a $50,000 investment in a fund that follows the sample fee schedule outlined above and has a standard sales charge of 5.0%. If the investor commits to making ten $5,000 payments over the next 13 months through a LOI, then the investor will pay a 3.75% sales charge on each investment.
ROA permit 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 LOI has expired. Any additional investments would incur a sales charge of 3.75% until the investor reaches the next breakpoint of $100,000.
Basically, ROA grant holders of mutual fund shares the potential for reduced commissions when purchasing more shares. In some cases, ROA may also extend beyond just the targeted share class for investment.
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Description Related TermsA mutual fund consists of a portfolio of stocks, bonds, or other securities and is overseen by a professional fund manager.
A contingent deferred sales charge (CDSC) is a fee, or sales charge or load, which mutual fund investors pay when selling Class-B fund shares.
A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments and cash equivalents.
Tracking error tells the difference between the performance of a stock or mutual fund and its benchmark.
A target-date fund is a long-term investment account that is adjusted over time to reduce risk as the investor approaches a specific goal such as retirement.
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