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Mutual Fund Breakpoints and ROA
To understand what Rights of Accumulation, or ROA are, it is necessary to first understand what a breakpoint is.
Some mutual funds are sold in a manner that generates a sales charge or commission. This charge is often referred to as a sales load. Mutual funds that charge such a fee are called loaded mutual funds to distinguish them from their no-load mutual fund cousins.
The typical stock mutual fund that charges a front-load levies a sales charge of around 5.75%. That means that of the initial investment, 5.75% is deducted to pay the load and the remaining funds are invested in the account. This large initial up-front payment can significantly lower an investor’s returns for a long period of time. However, most fund families offer a discounted load to investors who invest certain minimum amounts. While each fund family has its own particular schedule of breakpoints, a common breakpoint chart provides discounts for investors who invest a minimum of $50,000, those who invest at least $100,000, those who invest at least $250,000, and those who invest over $1 million. The last discount being a full discount, meaning the investment can be made without any sales load at all.
Many mutual fund companies further offer investment discount breakpoints based upon the total investment made with the whole fund family’s offerings. In other words, if Mutual Fund Company X offers two mutual funds, Mutual Fund A and Mutual Fund B, any combination of investment in both funds totally $100,000 or more would qualify the investor to pay the discounted load.
Furthermore, the investor need not invest $100,000 with every subsequent investment in order to qualify for the breakpoint. Instead, the current balance of the accounts are considered when determining which breakpoint level to use to calculate the mutual fund load charge. For example, an investor with $115,000 already invested would be entitled to the $100,000 level breakpoint discount regardless of how small the next investment was.
Combined, these features are called Rights of Accumulation.
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Letter of Intent LOI
Savvy investors without the funds available to meet a certain level of breakpoint, but who anticipate having such funds in the near future would be wise to hold off on making their investments until they had accumulated all of the money necessary to reach the discount. Needless to say, this is not in the mutual fund company’s best interest.
To avoid this issue, most fund families offer investors the ability to commit to a future level of investment and apply the appropriate breakpoint discount based upon this commitment. Of course, such arrangements are time limited, with the typically allowed time to fulfill the commitment being 13 months.
To take advantage of this offering, investors file a Letter of Intent with the mutual fund company. Most Letters of Intent, known as LOI, take the shape of a form provided by the fund family in which the investor details the size of their potential future investment. The appropriate discount for this promised level is then applied to all investments from the beginning regardless of the initial investment’s size. However, if the committed amount is not invested in total by the end of the term specified in the LOI, the fund company will recalculate every purchase made, including any reinvested dividedness or interest, applying the lower breakpoint that was actually achieved. This can result in a significant loss in account value.