What is a 'Contingent Deferred Sales Charge (CDSC)'
A contingent deferred sales charge (CDSC) is a fee (sales charge or load) that mutual fund investors pay when selling Class-B fund shares within a specified number of years of the date on which they were originally purchased. This is also known as a "back-end load" or "sales charge". For mutual funds with share classes that determine when investors pay the fund's load or sales charge, Class-B shares carry a contingent deferred sales charge during a five- to 10-year holding period calculated from the time of the initial investment.
BREAKING DOWN 'Contingent Deferred Sales Charge (CDSC)'The contingent deferred sales charge amounts to a percentage of the value of the shares being sold, and can vary with each mutual fund. It is highest in the first year of the specified period and decreases annually until the period ends, at which time the CDSC drops to zero. A CDSC can start out at 5% or more before decreasing in subsequent years.
As a mutual fund investor, if you were to buy and hold Class-B fund shares until the end of the specified period, you could avoid paying this type of fund's sales charge, thereby enhancing your investment return. Unfortunately, fund research indicates that mutual fund investors are holding their funds, on average, for less than five years, which often triggers the application of a back-end sales charge in a Class-B share fund investment.
Differences in Fee Structures Between Share Classes
Different mutual fund share classes carry different load structures and expense ratios. Investors can choose which share class they want to buy that makes the most sense depending on their personal circumstances.
Class-A shares typically have a front-end load, but no CDSC. Class-B shares often have no front-end sales charge, but have the potential for a sales charge upon the sale of shares. Class-C shares may have a lower front-end or back-end load, but carry a higher overall expense ratio. Sales charges may be reduced if an investor makes a larger investment, so the investment amount and anticipated holding period should be primary factors when determining the appropriate share class. In each case, the fund's load is a way for a financial advisor to receive a sales commission on a transaction.
Example of a Fund with a CDSC
The American Funds Growth Fund of American Class B ("AGRBX") is an example of a fund with a contingent deferred sales charge. It has no front-end sales charge, but the CDSC is assessed on certain redemptions made within the first six years that shares are owned. The CDSC starts at 5% in the first year and gradually declines to 0% by the seventh year.