What is Breakpoint?
In the mutual fund world, a breakpoint is the size of an investment that qualifies the investor for a lower load.
How Does Breakpoint Work?
Let's assume you are interested in making a $10,000 investment in the Company XYZ mutual fund, which has a 4% front-end load (a fee for buying the shares). If you invest at least $15,000, however, the load goes down to 3%.
Thus, of the $10,000 investment, $400 ($10,000 x .04) is paid to the fund company and $9,600 is actually invested in the fund as a result of investing less than $15,000. Ideally, the earnings from the investment should more than make up for the load. In this example, the front-end loaded fund must return 14.6% in one year to reach $11,000 in value, but the no-load fund must only return 10% to do so. The fund would not have to earn as high a return if the investor invests over the breakpoint.
Some funds many have more than one breakpoint. In some cases, an investor can sign a letter of intent with the investment company, promising to invest a certain amount over time in order to qualify for the reduced load now. Additionally, some investments provide for a right of accumulation, which grants a lower load when the investment reaches a certain level over a certain time period.
Why Does Breakpoint Matter?
Loads discourage investors from frequently trading their mutual fund shares, an activity that requires funds to have considerable amounts of cash on hand rather than invested. Generally, however, a load is considered payment for the broker's expertise in selecting the right fund for the investor.
It is important to understand that a load is only one of several types of fees that may be charged. Thus, when comparing investments, investors should be careful to evaluate all fees associated with an investment, not just the size of the load. Additionally, the nature of the investment, the investor's risk tolerance, and the investor's time horizon should always be considered when evaluating any investment.