How Mutual Funds are Sold

It's been said that mutual funds are expensive investments, which is why holding periods of mutual fund investments tend be a bit longer than other investments. You may ask yourself why even purchase into a mutual fund if there is a greater cost associated. Well, the benefits may be greater diversification, greater liquidity, etc. But do you know that you can get a discount for buying in bulk? Most investors are not aware of this, in fact. Three types of discounts exist when purchasing mutual fund shares: Rights of Accumulation, Letter of Discount, and Breakpoints.

Rights of Accumulation
This type of discount is more or less a promise to purchase additional shares of a fund and in return receive a discount on a sales charge. This promise to purchase shares can be much longer than a letter of discount as described below. In fact, a rights of accumulation can present a discount for often up to 8 or 10 years. In effect this discount gives investors a reduced sales charge for purchasing more shares over an extended period of time.

Letter of Discount
Letter of discount is similar to rights of accumulation, but involves a much shorter period of time- as long as one year. All investors have the option to receive a letter of discount, however, they must sign a letter of discount within 90 days of the initial purchase. If investors later decide not to purchase shares as promised in the letter of discount, the discount is lost by charging the non-discounted sales charge at redemption.

Breakpoints
This discount is a bulk discount at the initial purchase point. Breakpoints are tiered in a way that the more you buy, the more the discount is; however there is a floor sales charge. If enough shares are purchased to reach a floor sales charge, the sales charge will not decrease further.


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