What Does CDSC Stand For and How Does It Work?
Learn about CDSC (Contingent Deferred Sales Charge). This guide explains how this mutual fund fee works, its application, and its effect on your investments.
A Contingent Deferred Sales Charge (CDSC) is a sales charge associated with certain investment products, primarily mutual funds. This fee is not paid when an investor purchases shares but rather when they sell or redeem them.
Understanding CDSC
A CDSC functions as a back-end load. Its primary purpose is to compensate the financial advisor or broker who facilitated the sale of the fund shares. It also serves to discourage short-term trading by encouraging investors to hold their shares for a longer period. The “contingent” aspect of the charge indicates that the fee amount can vary, typically decreasing over time, or may be waived under specific circumstances. This structure aims to align the interests of the fund company and the advisor with long-term investment horizons.
How CDSC is Applied
A CDSC involves a declining fee schedule over a specified period, commonly ranging from five to eight years. For instance, an investor might face a 5% charge if shares are redeemed in the first year, which could then decrease to 4% in the second year, and so on, eventually reaching zero after the full holding period. This fee is calculated as a percentage of the original purchase cost or the redemption value, whichever amount is less.
Several exceptions and waivers exist that can reduce or eliminate the CDSC. Investors can withdraw a certain percentage of their fund’s value annually, up to 10%, without incurring the charge. The CDSC is also waived if the shares are held beyond the declining schedule’s expiration. Waivers may also apply in situations such as the death or permanent disability of the shareholder, or for certain distributions from tax-deferred retirement plans.
Mutual Fund Share Classes
A CDSC is most commonly associated with Class B mutual fund shares. These shares do not have an upfront sales charge, appealing to investors who prefer to avoid immediate fees. Instead, investors in Class B shares pay the CDSC if they sell their shares before the designated holding period expires.
Class C shares may also feature a CDSC, though it is smaller in percentage and applies for a shorter duration, typically one year, or they might have a level load structure. In contrast, Class A shares impose a front-end load paid at the time of purchase and do not include a CDSC. The availability of different share classes with varying fee structures allows investors and their advisors to select options that align with their anticipated investment horizon and payment preferences.