Terms

Understanding Contingent Deferred Sales Charge CDSC

Understanding Contingent Deferred Sales Charge CDSC

Understanding Contingent Deferred Sales Charge (CDSC)

What Is a Contingent Deferred Sales Charge (CDSC)?

A contingent deferred sales charge (CDSC), also known as a "back-end load" or "sales charge," is a fee that mutual fund investors pay when selling Class-B fund shares within a specified number of years from the original purchase date. 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. The CDSC is expressed as a percentage of the dollar amount invested into a mutual fund and may also be referred to as an exit fee or redemption charge.

Key Takeaways

  • Many consider the CDSC to be payment for the broker’s expertise in choosing a mutual fund that fits an investor’s goals.
  • Class-A shares typically have no CDSC, while Class-B shares often have 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.

How to Avoid Contingent Deferred Sales Charges

An investment will reduce contingent deferred sales charges for each year the investor holds the security. If the investor holds the investment for the duration of the surrender period, many fund companies waive the back-end fee.

If a mutual fund investor holds Class-B fund shares until the end of the specified hold period, they can avoid paying this type of fund’s sales charge, enhancing their investment return. However, research shows that on average, mutual fund investors hold their funds for less than five years, triggering the application of a back-end sales charge in a Class-B share fund investment.

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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 may have 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 substantial initial investment. The investment amount and anticipated holding period should be primary factors in determining the appropriate share class to buy. The fund’s load is a way for a financial advisor to receive a sales commission on the transaction.

Effects and Purposes of Contingent Deferred Sales Charges

CDSCs discourage active trading of mutual fund shares and allow mutual funds to maintain appropriate levels of liquid cash. Many consider the CDSC to be payment for the broker’s expertise in choosing a mutual fund that fits an investor’s goals. Prospective investors can evaluate all costs associated with an investment, including the CDSC, through the information provided in prospectuses along with their risk tolerance and time horizon.

Real-World Example

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 of owning the shares. The CDSC starts at 5% in the first year and gradually declines to 0% by the seventh year.

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