Some mutual fund families -- typically those sold by investment advisors -- have different classes of shares with different fee or commission structures. Class B shares do not have an upfront sales charge, but the shares include a contingent deferred sales charge -- CDSC. This charge is paid by an investor if shares are redeemed within the first 4 to 7 years after investing in a fund. If you have purchased Class B shares of a fund, you will be charged a redemption fee or withdrawal charge on shares you sell during the CDSC period.
1. Look up the CDSC schedule for your specific mutual fund. The schedule is listed in the fund's prospectus, of which you received a copy when you bought the fund. The prospectus can also be found on the fund's website. For example, one fund family has a 7-year CDSC schedule of 5, 4, 4, 3, 2, 2 and 1 percent for years 1 through 7 after purchase.
2. Calculate the number of shares you will redeem for the dollar value of the fund you plan to cash in. For example, if you want to withdraw $1,000 from your fund account and the current share price is $10, you will redeem 100 shares.
3. Analyze your fund account to determine if any shares will be redeemed without a CDSC charge. Shares purchased with reinvested dividends or capital gains have no redemption fee, and the fund will redeem these first to minimize the amount of the redemption charge. In this example, you have a total of 20 shares in your account from reinvestment.
4. Determine which value is lower, the price you paid for the shares or the current share price. The CDSC is calculated on whichever is lower. In the example, assume the shares were purchased at an initial price of $9 per share.
5. Multiply the shares to be redeemed minus the number of shares from reinvestment times the applicable share price to determine the dollar value subject to the CDSC. In the example, 20 shares are from reinvestment, leaving 80 shares. The 80 is multiplied by the $9 purchase price for a total of $720.
6. Multiply the amount of redemption subject to the CDSC by the CDSC percentage based on how long you have owned the shares. For the example, you have owned the shares for 3 years and the CDSC percentage is 4 percent. $720 times 4 percent gives a withdrawal charge of $28.80, leaving a net withdrawal amount of $971.20 if you redeem $1,000 of your Class B shares.
- If you redeem Class B shares, the fund company should determine which combination of shares produces the lowest sales charge. Use these steps to check their calculations.
- The method of calculating the CDSC will be disclosed in the fund's prospectus.
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