Tips to Save on Mutual Fund Charges

 In Investing

As we discussed in a recent blog post, mutual funds are offered in three different styles. Class A, B, and C shares each have unique characteristics in the way they charge fees and each has its benefits based on the customers time horizon and other circumstances. It’s important to understand what you’re invested in so hidden fees aren’t eating away at your returns. Here we’re going to show a few other helpful ways to save on fees so that you’re able to maximize your profit potential.

Investment companies have a limit on how much they are able to charge customers and they must meet certain requirements in order to charge the maximum amount. If they don’t meet the requirements, then the maximum charge they’re allowed to assess is reduced. This maximum sales charge is 8.5% and in order to qualify for it, the investment company must offer both breakpoints and rights of accumulation. Without these offerings, they cannot charge 8.5%.

Let’s begin with breakpoints. This is basically a schedule of discounts a mutual fund offers based on how much the customer is investing. Breakpoints are available to any person, and the term person includes married couples, parents and their minor children, and corporations. Below is an example of what a breakpoint schedule may look like and as you can see if you invest more money, the fund will cut you a break on the sales charge.

Amount                         Sales Charge

$0 – $24,999 6%
$25,000 – $49,999 5.5%
$50,000 – $99,999 5%
$100,000 – $249,999 3%
$250,000 – $499,999 2%

 

A bonus to breakpoints is they allow a little bit of flexibility through a letter of intent. In a LOI, the investor informs the investment company they intend to invest additional funds necessary to reach a breakpoint within the next 13 months. It’s a one-sided contract binding on the fund only. The fund will hold these additional shares in escrow and if the customer does not make the investment he can either send a check for the difference in sales charges or cash in the escrowed shares to pay the difference. It’s also important to note it’s prohibited for people to sell shares in an amount just below a breakpoint. This is known as a breakpoint sale.

An additional way to find a reduction in sales charges is through the combination privilege. Mutual funds generally offer more than one fund in their “family of funds” and say for instance you own $15,000 in one of their funds and $10,000 in another, you would be able to combine those to reach a breakpoint in the sales charge. Many companies also offer exchange privileges that allow customers to exchange within a company’s family of funds without an additional charge. This can be useful if there is a long-term investment horizon that starts at a younger age and slowly turns more conservative as the client reaches retirement age.

As we always stress, it’s imperative to know exactly what you’re invested in so you aren’t getting taken advantage of. Fees add up quickly and especially add up over time so it’s key to keep fees at the bare minimum. They can heavily eat into your returns, and on years where the market is slow, bring you a small loss instead of a small gain. Next time you meet with your advisor be sure to ask about any breakpoints or combinations you may be able to take advantage of to save your money.

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