Mutual Fund Sales Charges and Share Classes
When you buy shares of a mutual fund through an intermediary, like a brokerage firm, you may be required to pay a load, or sales charge, to cover the cost of the transaction. Some mutual fund companies offer both
Types of Load Funds
When you buy a front-end load mutual fund, you pay a sales charge at the time of purchase. The fund takes a percentage of your investment, which typically ranges from 2.5% to 6%. Because the sales charge reduces the amount of your original investment, you end up purchasing fewer shares than you would have without the charge. For example, if you invest $2,500 in a fund with a 5% front-end load, you will actually purchase $2,375 worth of shares, paying $125 in fees.
Back-end load funds charge you when you sell your shares. The back-end load, which is also known as a contingent deferred sales charge (CDSC), can be calculated as a percentage of NAV, or in a variety of other ways. The longer you hold your shares, the smaller the fee becomes, typically dropping 1% each year. If you hold your shares for long enough - often a period of 5 to 7 years - the fee will disappear.
Level-load funds don't assess sales charges when you invest or when you sell your shares. However, you pay an annual fee based on a percentage of your invested assets, sometimes making the cost of owning a level-load fund substantially more than if you only paid a one-time fee. In addition, if you sell before owning the fund a full year, you may be charged a contingent deferred sales charge.
Mutual fund companies distinguish the way sales loads are charged based on the type of share class, the most common of which are A, B and C shares. Mutual fund shares with front-end loads are classified as Class A shares. Those with back-end loads are Class B, and those with level-loads are Class C. If you hold your Class B shares long enough, they will usually convert to Class A shares, thereby enabling you to avoid paying the back-end load upon selling them.
Mutual funds with front-end loads sometimes offer breakpoints, meaning that certain levels of investment qualify you for a reduced sales charge. You can reach a breakpoint with a one-time investment, or by aggregating a number of smaller investments made by you, and sometimes by your family, to the same fund or fund family. Rights of accumulation allow you to combine past and present investments to reach a breakpoint.
Most mutual funds offer investors a variety of ways to qualify for breakpoint discounts on the sales charge associated with the purchase of Class A shares.
In general, most mutual funds provide breakpoint discounts to investors who make large purchases at one time. The extent of the discount depends upon the size of the purchase.
Generally, as the amount of the purchase increases, the percentage used to determine the sales load decreases.
Mutual funds have different rules regarding the availability of Rights of Accumulation and Letters of Intent. You should review the mutual fund prospectus to determine the specific terms upon which a mutual fund offers Rights of Accumulation or Letters of Intent.
Rights of Accumulation
Many mutual funds allow investors to count the value of previous purchases of the same fund, or another fund within the same fund family, with the value of the current purchase, to qualify for breakpoint discounts. Mutual funds also allow investors to count existing holdings in multiple accounts, such as IRAs or accounts at other broker-dealers, to qualify for breakpoint discounts.
If you have accounts at other broker-dealers and wish to take advantage of the balances in these accounts to qualify for a breakpoint discount, you must advise your local Scottrade Branch Office. You may need to provide documentation establishing the holdings in those other accounts if you wish to rely upon balances in accounts at another firm.
Many mutual funds allow investors to count the value of holdings in accounts of certain related parties, such as spouses or children, to qualify for breakpoint discounts. Each mutual fund has different rules that govern when relatives may rely upon each other's holdings to qualify for breakpoint discounts. You should review the mutual fund's prospectus or statement of additional information to determine what these rules are for the fund family in which you are investing.
Mutual funds also follow different rules to determine the value of existing holdings. Some funds use the current net asset value (NAV) of existing investments in determining whether an investor qualifies for a breakpoint discount. A small number of funds use the historical cost. You should review the prospectus to determine whether the mutual fund uses either NAV or historical costs to determine breakpoint eligibility.
Letters of Intent
Most mutual funds allow investors to qualify for breakpoint discounts by signing a Letter of Intent, which commits the investor to purchasing a specified number of Class A shares within a defined period of time, usually 13 months.
If an investor fails to invest the amount required by the Letter of Intent, the fund is entitled to retroactively deduct the correct sales charges based upon the amount that the investor actually invested. If you intend to make several purchases within a 13-month period, you should consult the mutual fund prospectus to determine if it would be beneficial for you to sign a Letter of Intent.
Understanding the availability of breakpoint discounts is important because it may allow you to purchase Class A shares at a lower price. The availability of breakpoint discounts may save you money and may also affect your decision regarding the appropriate share class in which to invest.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. A prospectus contains this and other information. A mutual fund prospectus is available through www.scottrade.com or through a Scottrade branch office. The prospectus should be read carefully before investing.