Contingent deferred sales charge

Contingent deferred sales charge

A contingent deferred sales charge, or CDSC, may be imposed on a sliding scale, with higher costs being assessed for shares sold more quickly after acquisition. CDSCs are usually calculated as a percentage of the shares’ entire value. 

Mutual fund companies generally impose the CDSC to recoup the costs of selling the fund. They are typically assessed on shares sold within a specific time frame after purchasing them.  

CDSCs can vary significantly from one fund to another, so it’s important to understand how they work before investing. 

What is the CDSC?

The CDSC is a fee that may be imposed on certain types of investments when they are sold. This fee is typically assessed by mutual fund companies and is based on a percentage of the sale price.  

The CDSC is generally assessed on investments that are held for less than a certain period, typically 5 years. This fee is designed to discourage investors from selling their investments too soon. 

It’s also possible to avoid CDSCs by holding onto your shares for the long term. If you’re unsure whether a CDSC will be imposed on your investment, it’s best to ask the fund company before investing.

How does CDSC work?

The CDSC is typically assessed on a sliding scale, with lower fees charged for longer holding periods. The CDSC is designed to discourage investors from frequently buying and selling fund shares, and to offset the costs associated with such activity. 

CDSCs can be a significant expense for investors who are unaware of them or do not hold their shares for the long term. For example, if an investor buys $10,000 worth of shares in a fund with a 5% CDSC and sells them one year later, he will owe $500 in CDSCs. This can eat into the investment returns realized by him. 

How is CDSC calculated？

We know that the CDSC is a fee some mutual fund companies charge when an investor redeems (sells) shares before a specific period. The time period is typically five to seven years. The CDSC declines over time and is usually zero after a specified period. 

CDSC is calculated as a percentage of the redemption amount and is typically in the range of 1% to 4%.  

For example, if an investor redeems $10,000 of mutual fund shares with a CDSC of 2%, the investor would pay a $200 CDSC. 

Effects and purposes of the CDSC

The purpose of the CDSC  is to discourage investors from selling their shares too soon after purchasing them. 

CDSCs usually decline over time, and they’re often waived altogether if the investor holds onto their shares for a certain number of years. However, if an investor does sell his shares before the CDSC expires, they may be subject to a fee of 1% or more. 

While CDSCs can deter short-term investors, they can also incentivize long-term investors to hold onto their shares. By keeping investors in the fund for an extended time, CDSCs can help ensure that the fund has the resources it needs to grow and perform well over the long term. 

Examples of how CDSC works

There are a few situations where you may be subject to a CDSC. 

For example, when you sell your mutual fund shares within a specific time frame after purchasing them, you may have to pay a CDSC. This charge is typically a percentage of the sale price and is designed to deter investors from selling their shares too soon.  

Another situation in which you may be subject to a CDSC is if you redeem your shares before a specific date. In this case, the CDSC is designed to compensate the fund company for the costs associated with early redemption. 

For example, a fund company might charge a 5% CDSC on shares sold within the first year after purchase, and a 3% CDSC on shares sold between one and two years after purchase. CDSCs can be expensive for investors who sell their shares early, so it’s essential to consider them before investing. 

Frequently Asked Questions