What is Contingent Deferred Sales Charges?

Contingent Deferred Sales Charges (CDSC) are fees imposed on mutual fund investors if they redeem their shares before a specified period. Unlike front-end loads, which are paid at the time of purchase, CDSCs are paid at the time of sale and decrease over time.  

The purpose of these charges is to compensate the fund for the cost of selling the shares, which can be substantial if the investment is held for a short period. For example, if an investor sells their mutual fund shares within the charge period, they might incur a CDSC fee based on the amount redeemed and the time the shares have been held. 

How to Avoid Contingent Deferred Sales Charges 

To minimise or avoid Contingent Deferred Sales Charges, consider the following strategies: 

Choose Funds with No CDSC: Some mutual funds do not impose CDSC fees, especially those with front-end loads or no sales charges. 

Hold Shares Long-Term: The CDSC typically reduces over time. Holding onto shares for the full duration of the CDSC schedule can help avoid fees. 

Opt for Lower CDSC Funds: Some funds have lower CDSC rates, which may be more manageable if early withdrawal is anticipated. 

Review Fund Share Classes: Ensure you understand the fee structure of the share class you invest in; as different classes have different CDSC schedules. 

CDSC Fee Structures in Different Share Classes 

Different mutual fund share classes feature varying CDSC fee structures: 

Class A Shares: Typically have a front-end load, meaning a fee is charged when shares are purchased. They usually do not have a CDSC. 

Class B Shares: Often come with no front-end load but may include a CDSC if shares are sold within a specified period. The CDSC generally decreases over time and may be eliminated after several years. 

Class C Shares: Generally, have a lower front-end load or a small back-end load and a higher ongoing expense ratio. They may also have a CDSC, but it is usually lower compared to Class B shares. 

Example of Contingent Deferred Sales Charges 

Here is an example of how CDSC works: 

An investor buys ₹50,000 worth of mutual fund Class B shares with a CDSC schedule of 6%, 5%, 4%, 3%, and 2% for the first five years. If the investor needs to withdraw ₹20,000 after three years, they would face a CDSC of 4%. Therefore, the fee would be ₹20,000 x 4% = ₹800. The remaining amount, ₹19,200, would be the net amount received after the CDSC is deducted.  

This illustrates how the CDSC is applied to early withdrawals and decreases over time, encouraging long-term investment.