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.

RELATED TERMS
  1. Load Fund

    Load funds charge fees of less than 1% in order to compensate ...
  2. Load

    A load is a sales charge commission charged to an investor when ...
  3. Back-End Load

    Back-end load refers to the money a mutual fund charges to a ...
  4. Sales Charge

    A sales charge is a commission paid by an investor on his or ...
  5. No-Load Fund

    A mutual fund in which shares are sold without a commission or ...
  6. Exit Fee

    An exit fee is a fee charged to investors when they redeem shares ...
Related Articles
  1. Investing

    Mutual Fund Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  2. Retirement

    7 Reasons to Yank a Mutual Fund from Your 401(k)

    Not all mutual funds are created equal. Here are some practical tips for recognizing – and ditching– low-value mutual funds that might be in your 401(k).
  3. Investing

    The Lowdown on No-Load Mutual Funds

    No-load mutual funds let you cut out the middleman—and the fees.
  4. Investing

    Trading mutual funds for beginners

    Learn the basics about mutual funds, including the types of strategies available and the different fees they may charge.
  5. Investing

    Consider These Fees When Evaluating Mutual Funds

    The best way to evaluate a mutual fund is by digging a bit deeper into the fees charged.
  6. Investing

    A Guide For Picking Long Term Mutual Funds

    Learn about considerations for investors when buying shares in a mutual fund for a long-term investment, including fees, type of management and portfolio goals.
  7. Investing

    ETFs vs. Mutual Funds: The Lowdown on Costs

    Confused about the full range of fees on ETF and mutual funds? Here's a quick guide on fees and expenses.
  8. Investing

    When To Sell A Mutual Fund

    It can be tempting to sell an underperforming mutual fund, but there are a few key factors to consider before jumping ship.
  9. Investing

    Why Are ETF Fees Lower Than Mutual Funds?

    Discover all the reasons ETFs typically have lower fees than mutual funds, including their passive management and the absence of load and 12b-1 fees.
RELATED FAQS
  1. What's the difference between a load and no-load mutual fund?

    A mutual fund is simply a large group of people who lump their money together for a management company to invest. Shares ... Read Answer >>
  2. How Do You Find Out the Price of a Mutual Fund?

    The easiest way to find out the price of a mutual fund is to look at its net asset value (NAV). Read Answer >>
Trading Center