Glossary term
Contingent Deferred Sales Charge (CDSC)
A contingent deferred sales charge is a mutual fund sales charge paid when shares are redeemed within a specified holding period.
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What Is a Contingent Deferred Sales Charge?
A contingent deferred sales charge, or CDSC, is a mutual fund sales charge paid when shares are redeemed within a specified holding period. It is contingent because the charge usually applies only if the investor sells before the schedule expires.
A CDSC is often associated with Class B or Class C mutual fund shares. The charge may decline over time, such as falling each year until it reaches zero, depending on the fund's prospectus.
Key Takeaways
- A CDSC is a back-end sales charge triggered by selling within a stated period.
- The charge often declines the longer the investor holds the shares.
- It is separate from ongoing fund expenses such as management fees and 12b-1 fees.
- Investors should review the prospectus to understand the schedule, waivers, and holding-period rules.
How the Charge Works
A fund may allow investors to buy shares without a large upfront load, but then impose a CDSC if shares are sold too soon. The charge compensates the distributor or intermediary for sales-related costs that were not paid at purchase.
The amount is usually calculated as a percentage of the redemption amount or original purchase amount, depending on the prospectus. Some funds waive the CDSC for certain events, account types, or systematic withdrawal plans.
Example Schedule
Holding Period | Illustrative CDSC |
|---|---|
Year 1 | 5% |
Year 2 | 4% |
Year 3 | 3% |
Year 4 | 2% |
After schedule ends | 0% |
This table is only an illustration. Actual CDSC schedules vary by fund and share class.
Cost Tradeoff
A CDSC can make a fund look cheaper upfront, but it reduces flexibility. If the investor needs to sell earlier than expected, the charge can reduce proceeds. If the share class also has higher ongoing expenses, the total cost can be meaningful.
The practical question is not only whether there is a CDSC. It is whether the full fee structure fits the investor's time horizon and whether a lower-cost share class is available.
The Bottom Line
A contingent deferred sales charge is a back-end mutual fund sales charge tied to early redemption. It can be manageable when the holding period is clear, but costly when the investor needs liquidity sooner than expected.