Contingent deferred sales charges (CDSCs) are charges imposed on shareholders of Class B share and Class C share mutual funds (and some other share classes) who sell their shares in the fund during the surrender period. These CDSCs are not paid to advisors, but to the fund company to cover various costs, including the upfront commissions the fund pays to advisors (often as high as 4%). Investors do not see these upfront commissions charged by funds that are paid to the advisors who offer the fund shares for purchase.
Specific CDSCs are outlined in the mutual fund’s prospectus and the cost depends on how long the investor holds his/her shares. Many mutual fund B shares have a CDSC that is reduced to 0% by year six, while in year seven, the mutual fund Class B shares convert to Class A shares (which carry no surrender charges and have lower 12b-1 fees).