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Mutual Funds/Break Even Mutual Fund Price

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Question
QUESTION: Hello:

How is the break even sell price determined for no-load mutual funds?.

1. For example, if a $100.00 purchase in a mutual fund is purchased at $10.00, and later a $50.00 purchase is made for $5.00 in the same mutual fund, how would the investor know that it is or is not a profitable time to sell all or some of his mutual fund shares at a gain and not a loss?

2. Should the annual management fee be taken into consideration when determining the price?

3. If a mutual fund has an upfront fee or a back end fee plus a 12b-1 fee, are these fees taken into consideration too?


I thank you for your reply.

ANSWER: Hi Kenneth,

1. All you would need to do is take your sales proceeds (value of the position) and subtract your cost basis (purchases) and when you answer is zero, it is at the break even.

2. The annual management fee is already deducted from the fund's net asset value of the fund.

3. 12B-1 fees are already deducted from the net asset value of the fund.  Yes, front end and back end charges would affect your sales proceeds and your cost basis.

Michael

---------- FOLLOW-UP ----------

QUESTION: Hello:

I want to thank you for your reply.

I have a follow-up question regarding your reply to number 1.  How would the break even price be determined if there is a front end commission of 3% or a back end commission of 3%.  In your reply that solution is applicable to a no-load mutual fund, correct?

I thank you for your reply.

Answer
Hi Kenneth,

First, there are no commissions on mutual funds.  They are called sales charges (front end or back end).  It would still be the same reply.  The break even sales price is the price which makes your sales proceeds equal to the cost of buying the shares.  It is applicable to any type of mutual fund or any type of investment.

Buy shares at 5,000 +300 sales charge  = 5300  = cost basis.  The value of the position would only be $5,000

To break even, you would have to sell it for a value of 5,300 net of charges

I hope this helps.

Michael

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Michael Weiss, CFA

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I am the owner of Series 7 Exam Tutor , a financial tutoring business that provides personalized tutoring for the Series 7 Exam, the Series 6 Exam ,the Series 65 Exam, the Series 66 Exam, the Series 63 Exam and the Series 24 Exam . I also offer tutoring for finance courses. For additional information, please visit, Finance Exam Tutor. Prior to launching Series 7 Exam Tutor, I worked in investments for 20 years with the majority of this time focused on investment analysis and portfolio management. I have worked for large companies such as Merrill Lynch and Evergreen Investments and have also worked for smaller firms as well. Throughout my career, I have sought to mentor younger colleagues whenever possible, especially those enrolled in the CFA program. I completed the CFA program in 2002 after passing all three exams on the first try. I also passed the Series 7 Exam with a score of 94%. For additional information about me, you can visit the links below:
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