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

    A mutual fund that comes with a sales charge or commission. The ...
  2. Front-End Load

    A commission or sales charge applied at the time of the initial ...
  3. Exit Fee

    A fee or charge assessed to an investor for withdrawing money ...
  4. Deferred Load

    A sales charge or fee that is assessed when an investor sells ...
  5. Reclassification

    The process of changing the class of mutual funds once certain ...
  6. Redemption Fee

    A fee collected by an investment company from traders practicing ...
Related Articles
  1. Investing

    Selling Mutual Funds: What Happens When You Liquidate?

    Learn about the hidden costs that can be triggered when you redeem mutual fund shares. Even no-load funds have fees and expenses you may not know about.
  2. Financial Advisor

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  3. Investing

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
  4. Investing

    A Guide to Mutual Funds 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.
  5. Investing

    The ABCs of Mutual Fund Classes

    Do you understand how the various types of shares differ? We give you the pros and cons of each.
  6. Investing

    What is the Importance of a Share's Class?

    The meaning of share classes varies, depending on the investment vehicle.
  7. Investing

    What's a No-Load Fund?

    A no-load fund is a type of mutual fund that does not charge a front-end, back-end or level sales charge.
  8. Investing

    The Lowdown On No-Load Mutual Funds

    These funds let you cut out the middleman - and the fees.
RELATED FAQS
  1. How do no-load funds typically perform relative to load funds?

    Understand the difference between no-load mutual funds and funds that carry a sales load, and learn which of the two has ... Read Answer >>
Hot Definitions
  1. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  4. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
Trading Center