What is a Breakpoint?

As related to mutual funds, a breakpoint is the level or amount of investment purchases that are required in order to earn the investor a discounted sales fee. Depending on the structure of the mutual fund program, it may be possible achieve a breakpoint by a single large purchase, or by a series of smaller purchases that result in reaching the purchase level cumulatively.

Part of the basic structure of most mutual fund programs is that there is a charge when an investor chooses to purchase shares. Often referred to as a front-end load, this sales fee or charge is usually based on a percentage of the total purchase price associated with the transaction. When a single purchase — or an aggregate total of purchases within a given time frame — reach a certain dollar level, the terms of the fund may dictate that the investor receive a reduction in the percentage that is charged as the sales fee. That dollar level is considered to be the breakpoint.

Knowing the breakpoint that is associated with a given investment is usually a smart idea. Depending on the percentage that is normally charged as the sales fee, investors may be able to invest a slight increase in the purchase of shares and earn a discount that will cover a credible amount of that increase. The end result for the investor is the acquisition of additional shares, while still realizing a decreased overall cost, once the reduced sales fee is averaged into the unit cost for each purchased share.

It is not uncommon for there to be more than one breakpoint that an investor can realize. Along with the initial breakpoint, it may be possible to achieve a higher percentage discount on the sales charge by purchasing additional shares within a designated period of time. As the amount of purchase increases, so does the discount percentage associated with the sales fee. Over time, the savings to the investor can be significant.

The breakpoint serves as an added incentive to attract investors to purchase shares, as well as to maximize the involvement in the mutual fund by purchasing additional shares, rather than investing elsewhere. Depending on the performance of the shares associated with the fund, choosing to take advantage of the breakpoint and invest more revenue in one block of mutual funds can be a sound financial investment.