What Isꦍ a Contingent Deferred Sa✨les Charge (CDSC)?

A contingent deferred sales charge (CDSC) is a fee, sales charge or load, which mutual fund investors pay when selling Class-B fund shares within a specified number of years from the original purchase date. 🌱This fee is also known as a "back-end load" or 🅠"sales charge."

For mutual funds with 澳洲幸运5官方开奖结果体彩网:share classes that determine when investors pay the fund's load or sales charge, Class-B shares carry a contingent deferred 澳洲幸运5官方开奖结果体彩网:sales charge during a five- to 10-year 澳洲幸运5官方开奖结果体彩网:holding period calculated from the time o💃f the initial investment.

Many 澳洲幸运5官方开奖结果体彩网:annuities also charge a CDSC for contracts that are terminated within a certain number of years. The size of the CDSC is determined as a percentage, which dec𓄧reases with every year that a contract is held.

The financial industry usually expresses a CD♌SC as a percentage of the dollar amount invested into a mutual fund. So𓄧metimes, the finance industry may refer to a CDSC as an exit fee or a redemption charge.

How to Avoid Contingent Deferred Sales Charges

Generally, an investment will reduce contingent deferred sales charges for each year the investor holds the security. If the investor holds the investment long enough, i.e., for the duraಞtion of the surrender period, many fund companies waive the back-end fee.

If a mutual fund investor were to 澳洲幸运5官方开奖结果体彩网:buy and hold Class-B fund shares until the end of the specified hold period, they could avoid paying this type of fund's sales charge, thereby enhancing ✱thei𒆙r 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.

CDSC Fee Structures in Different Share Classes

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.

An investment broker may reduce sales charges if the investor makes a more substantial initial investment. The investment amount and anticipated holding period should be primary factors for the investor in determining the appropriate share class to buy. In each case, the fund's load is a way for a financial advisor to receive a sales commission on the transaction.

E🥀ffects and Purposes of Contingent Deferred Sales Charges

CDSCs tend to discourage investors from actively trading mutual fund shares, which would require mutual funds to keep significant levels of liquid cash on hand. Many consider the CDSC to be a payment for the broker's expertise in choosing a mutual fund that fits💦 an investor's goals. On prospectuses, mutual funds must disclose CDSC and other fees, so that investors may evaluate all costs associated with an investment along with🅠 other investor-specific factors such as risk tolerance and time horizon.

Example of Contingent Deferred Sales Charge

The American Mutuﷺ⛄al Fund () is an example of a fund with a contingent deferred sales charge.

It has no front-end sales charge, but the investment assesses a 1% CDSC on certain redemptions made within the first year of purchase.

The Bottom Line

A contingent deferred sales charge is an additional fee for holders of mutual funds and annuities who exit their investment within a certain time period. In both cases, the CDSC is intended to discourage short-term withdrawals and treat the asset as a long-term investment.