John Hancock Strategic Income Fund
Break Points Can Save You Money
Lately, mutual fund break points have been making news. One fund family is being sued over them and the National Association of Securities Dealers is investigating fund families in general about their use. So what's this mean to you, the individual investor? It all depends.
There are two things every investor needs to know about a fund's break points. First, what they are, and second, that they don't apply to every mutual fund investor. Let's look at that second point first.
"No-load funds don't have break points, " says Chris Doyle, vice president of public relations at American Century Investments. "Break points are typically applicable to those funds that are sold load."
A "load" fund is one that carries a sales charge--- a fee that's similar to a commission. No-load funds, on the other hand don't have sales charges which is why they're referred to as "no-load". And although all mutual funds ---load as well as no-load--charge their shareholders on-going annual fees, loads are a one time charge.
As for what break points are, simple put, they are a way to save money on the sales charges---or loads---that you pay when making a fund investment. The term refers to the dollar-investment level in a mutual fund at which an investor becomes eligible for a discounted sales fee. The class of shares you choose to invest in impacts a fund's break points---Class A shares carry the highest loads. Keep in mind that break points vary from fund to fund; dollar amounts invested; and fund family to fund family.
For example, at the American Century fund group, 10 of the 70 mutual funds this family offers carry a load. In their New Opportunity Fund 11, the maximum sales charge, or load, on its A shares is 5.75 percent for investments of less than $50,000. Decide to invest between $50,000 and $99,999. and the load drops to 4.75 percent. Have $500,000 to plop down and your sales charge will be 2 percent. And, over a million, you won't pay a penny in sales charges.
The PIMCO Total Return fund has a little different break point structure. The maximum sales charge on its Class A shares is 5.5 percent for investments of less than $50,000. That load drops to 4 percent on investments under $100,000. On AIMs Aggressive Growth Fund, the break points are a little cheaper: While the maximum sales charge is also 5.5 percent, it's for investments of less than $25,000. If you have more than $25,000 to invest and less than $50,000, the front-end load is 5.25 percent.
Two similarities among funds (regarding their break points) are that those investing over $500,000 typically pay a 2 percent sales charge on Class A shares and investors putting $1 million or more into a fund aren't hit with a load of any size. For them, the sales charge is $0.
While there's a break point table for all funds that carry sales charges, finding it may take a little digging. Years back that information seemed easier to spot in a fund's prospectus as it was often located near the front of that document. Today, a fund's break point chart is often found in the middle of the fund's prospectus; near the back; or in another publication. For example, the PIMCO Total Return fund's break point table isn't in its prospectus, it's in the PIMCO Funds Shareholder's Guide.
Bottom line: Break points are all about saving money for those who have a sizable amount of money to invest in one-lump sum. To learn more about them, along with other ways to save money on break points, the Investment Company Institute has an on-line guide that's worth reading. You'll find it at www.ici.org/funds/inv/bro_brkpts.html.
Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.
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