What Is Another Term for a Contingent Deferred Sales Charge?
Decode Contingent Deferred Sales Charges (CDSC). Understand this nuanced investment fee, its various designations, and how it impacts your investments.
A Contingent Deferred Sales Charge (CDSC) represents a fee some investors encounter when dealing with specific investment vehicles, most notably mutual funds. This charge can appear somewhat obscure due to its formal designation and the various ways it is referenced within the financial industry. Understanding this fee is important for investors to properly assess their investment costs and implications.
Alternative Terms for CDSC
The term Contingent Deferred Sales Charge is often referred to by several other names. The most common are “back-end load” and “deferred sales charge.” These terms are synonymous with CDSC, all describing a fee levied when an investor sells or redeems mutual fund shares. While terminology may differ, the concept of a sales charge applied at exit, rather than entry, remains consistent.
Understanding CDSC
A Contingent Deferred Sales Charge is a type of sales commission that investors pay when they redeem their mutual fund shares within a specified period after purchase. This charge exists, in part, to compensate the financial professional or firm that initially sold the fund shares to the investor. Unlike a “front-end load,” which is paid upfront at the time of investment, a CDSC is only assessed if the investor does not hold the shares for a predetermined length of time.
This fee structure incentivizes investors to hold their shares for longer periods, aligning with the fund’s long-term investment objectives. It functions as a penalty for early withdrawal, designed to offset the initial distribution costs borne by the fund company. While there might be no immediate sales charge when purchasing the fund, a cost is incurred upon early liquidation.
How CDSC Works
The application of a Contingent Deferred Sales Charge occurs when an investor redeems or sells their mutual fund shares before a specific holding period has elapsed. This period commonly ranges from five to seven years, though it can vary depending on the specific fund and its share class. The charge itself is structured as a declining percentage, meaning the fee decreases over time as the investor holds the shares longer. For example, a CDSC might be 5% if shares are sold in the first year, 4% in the second year, eventually reaching 0% after the defined holding period.
CDSCs are often associated with certain mutual fund share classes, particularly Class B and sometimes Class C shares. Class B shares do not impose an upfront sales charge, but instead feature a CDSC if shares are redeemed early, alongside higher annual expenses compared to other share classes. Class C shares have a smaller, flat CDSC that disappears after a shorter period, such as one year, but carry higher ongoing expenses than Class A or B shares. Investors should review a fund’s prospectus to understand the specific CDSC schedule and associated share class characteristics.