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    TRADE

    INVESTING GUIDE TO MUTUAL FUNDS

    Understanding Contingent Deferred Sales Charge (CDSC)


    By THE INVESTOPEDIA TEAM Updated August 24, 2024
    Reviewed by GORDON SCOTT

    What Is a Contingent Deferred Sales 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 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.

    Many 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 decreases with every year that a contract is held.

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

    KEY TAKEAWAYS
    A contingent deferred sales charge (CDSC) is an additional fee or sales charge for selling certain shares of
    a mutual fund within a certain time period.
    Many consider the CDSC to be a 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 the potential for a sales charge
    upon the sale of shares.
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    have a lower front-end or back-end load but carry a higher overall expense ratio.
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    content. If the investor holds the investment long enough, i.e., for the duration of the surrender period,
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    If a mutual fund investor were to buy and hold Class-BAccept


    fundAllshares until the end of the specified hold period, they
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    often triggers the application of a back-end sales charge in a Class-B share fund investment.
    Show Purposes
    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.

    Effects 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 Mutual Fund (AMFCX) 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.

    How Long Do You Need to Hold a Mutual Fund?


    Most mutual funds have a 30-day rule to discourage traders from making short-term trades, which can increase
    the fund's expense ratio. Mutual funds may institute an early redemption fee for short-term traders, or bar
    shareholders from making trades until after a certain number of days.

    How Soon Can You Repurchase a Mutual Fund After Selling It?
    The wash sale rule prohibits an investor from claiming a capital loss on a security, if they purchased the same or a
    substantially similar security within 30 days of the sale. For example, if you sell your stake in mutual fund ABC at a
    loss, you must wait at least 30 days before you can buy shares of ABC if you want to claim the loss.

    What Is a CDSC in Annuities?


    Many annuities charge a CDSC as a percentage of cash value if a contract is terminated before a certain time
    period. This charge is intended to penalize short-term withdrawals, and encourage investors to treat the annuity
    as a long-term investment. It also helps to defray the one-time costs of selling and promoting the fund.

    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.

    ARTICLE SOURCES
    Related Terms
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    Unit investment trusts (UIT) buy a fixed portfolio of securities and allows investors to redeem their “units,” similar to a mutual
    fund. more
    Tracking Error: Definition, Factors That Affect It, and Example
    Tracking error tells the difference between the performance of a stock or mutual fund and its benchmark. more
    What are Mutual Funds and How to Invest in Them?
    A mutual fund consists of a portfolio of stocks, bonds, or other securities and is overseen by a professional fund manager. more
    Money Market Funds: What They Are, How They Work, Pros and Cons
    A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments and cash equivalents.
    more
    What Is a Target-Date Fund? Risk Tolerance and Example
    A target-date fund is a long-term investment account that is adjusted over time to reduce risk as the investor approaches a
    specific goal such as retirement. more
    No-Load Fund: Definition, How It Works, Benefits, and Examples
    A no-load fund is a mutual fund in which shares are sold without a commission or sales charge. more

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