Before investing in mutual funds, it is important that
you understand the sales charges, expenses, and management fees that you
will be charged, as well as the breakpoint discounts to which you may be
entitled. Understanding these charges and breakpoint discounts will assist
you in identifying the best investment for your particular needs and may
help you reduce the cost of your investment. This disclosure document will
give you general background information about these charges and discounts.
However, sales charges, expenses, management fees, and breakpoint discounts
vary from mutual fund to mutual fund. Therefore, you should discuss these
issues with your financial advisor and review each mutual fund’s prospectus
and statement of additional information, which are available from your
financial advisor, to get the specific information regarding the charges and
breakpoint discounts associated with a particular mutual fund.
Sales Charges
Investors that purchase mutual funds must make certain
choices, including which funds to purchase and which class share is most
advantageous. Each mutual fund has a specified investment strategy. You
need to consider whether the mutual fund’s investment strategy is compatible
with your investment objectives. Additionally, most mutual funds offer
different share classes. Although each share class represents a similar
interest in the mutual fund’s portfolio, the mutual fund will charge you
different fees and expenses depending upon your choice of share class. As a
general rule, Class A shares carry a “front-end” sales charge or “load” that
is deducted from your investment at the time you buy fund shares. This
sales charge is a percentage of your total purchase. As explained below,
many mutual funds offer volume discounts to the front-end sales charge
assessed on Class A shares at certain pre-determined levels of investment,
which are called “breakpoint discounts.” In contrast, Class B and C shares
usually do not carry any front-end sales charges. Instead, investors that
purchase Class B or C shares pay asset-based sales charges, which may be
higher than the charges associated with Class A shares. Investors that
purchase Class B and C shares may also be required to pay a sales charge
known as a contingent deferred sales charge when they sell their shares,
depending upon the rules of the particular mutual fund.
Breakpoint Discounts
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. In fact, the entire sales charge may
be waived for investors that make very large purchases of Class A shares.
Mutual fund prospectuses contain tables that illustrate the available
breakpoint discounts and the investment levels at which breakpoint discounts
apply. Additionally, most mutual funds allow investors to qualify for
breakpoint discounts based upon current holdings from prior purchases
through “Rights of Accumulation,” and future purchases, based upon “Letters of Intent.” This document provides general information
regarding Rights of Accumulation and Letters of Intent.
However, mutual funds have different rules regarding the availability of Rights of Accumulation and Letters of Intent. Therefore, you
should discuss these issues with your financial advisor and 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. Moreover, mutual
funds allow investors to count existing holdings in multiple accounts, such
as IRAs or accounts at other broker-dealers, to qualify for breakpoint
discounts. Therefore, 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 financial advisor about those
balances. You may need to provide documentation establishing the holdings
in those other accounts to your financial advisor if you wish to rely upon
balances in accounts at another firm.
In addition, many mutual funds
allows 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 consult with your financial advisor or 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. If you wish to
rely upon the holdings of related parties to qualify for a breakpoint
discount, you should advise your financial advisor about these accounts.
You may need to provide documentation to your financial advisor if you wish
to rely upon balances in accounts at another firm.
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. However, a small
number of funds use the historical cost, which is the cost of the initial
purchase, to determine eligibility for breakpoint discounts. If the mutual
fund uses historical costs, you may need to provide account records, such as
confirmation statements or monthly statements, to qualify for a breakpoint
discount based upon previous purchases. You should consult with your
financial advisor and review the mutual fund’s 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 amount of Class A shares within a defined period of
time, usually 13 months. For example, if an investor plans to purchase
$50,000 worth of Class A shares over a period of 13 months, but each
individual purchase would not qualify for a breakpoint discount, the
investor could sign a Letter of Intent at the time of the first purchase and
receive the breakpoint discount associated with $50,000 investments on the
first and all subsequent purchases. Additionally, some funds offer
retroactive Letters of Intent that allow investors to rely upon purchases in
the recent past to qualify for a breakpoint discount. However, 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 your
financial advisor and the mutual fund prospectus to determine if it would be
beneficial for you to sign a Letter of Intent.
As you can see, 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. Therefore, you
should discuss the availability of breakpoint discounts with your financial
advisor and carefully review the mutual fund prospectus and its statement of
additional information, which you can get from your financial advisor, when
choosing among the share classes offered by a mutual fund. If you wish to
learn more about mutual fund share classes or mutual fund breakpoints, you
may wish to review the investor alerts available on the NASD Web site. See www.nasdr.com/alert_mfclasses.htm, and www.nasdr.com/alert_breakpoints.htm or visit the many mutual fund Web
sites available to the public.
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