When investing in mutual funds, many investors rely on the guidance of mutual fund distributors (MFDs). These professionals help individuals choose suitable funds, complete documentation, and track performance. But have you ever wonderedhow much commission mutual fund distributors get?

In this blog, well break down the commission structure ofmutual fund distributors in India, including both upfront and trail commissions, and how they affect investors.

Understanding Mutual Fund Distributor Commission

Mutual fund distributors earn commissions from Asset Management Companies (AMCs) for selling their mutual fund schemes. This income is based on the value of investments made through them and is categorized mainly into:

• Upfront Commission
• Trail Commission

What is Upfront Commission?

Upfront commission is a one-time payment made to distributors when a new investment is made. However,as per SEBI regulations, upfront commissions have largely been banned since 2018 to make the system more investor-friendly.

Currently, any upfront payment (if allowed) is borne by the AMC and not charged to the investor. In many cases, this is now replaced withtransaction charges, like ?100150 for first-time investors through a distributor.

What is Trail Commission?

Trail commission is the primary source of income for most mutual fund distributors today. It is a recurring commission paid by the AMC for as long as the investor stays invested in the fund.

The trail commission rate varies based on:

• Type of fund (equity, debt, ELSS, etc.)
• AMC policy
• Asset size brought in by the distributor=

Typical trail commission rates

Trail commissions vary depending on the type of mutual fund. Forequity mutual funds, distributors usually earn between0.75% to 1.25% per annum.Debt fundsoffer a lower trail, generally in the range of0.20% to 0.75% per annum. ForELSS (Equity Linked Savings Schemes), which come with a lock-in period, the trail commission can go up to1.50% per annum.Liquid funds, being low-margin products, offer the lowest trail commission usually between0.05% to 0.20% per annum.

For Example, if a distributor manages ?10 lakhs in an equity fund with a 1% trail, they would earn ?10,000 annually as long as the investment remains active.

Direct vs Regular Plans: Impact on Commission

Investors can choose betweenDirectandRegularmutual fund plans:

• Direct Planshave no distributor, hencezero commissionand lower expense ratios.
• Regular Plansinvolve a distributor, and their commission is included in the expense ratio.

Distributors earn only fromRegular Plans, which is why they often recommend them to clients.

Key Takeaways for Investors and Distributors

• Distributors earntrail commissionsas long as the client stays invested.
• No commissions are charged directly from the investors pocket its embedded in the funds expense ratio.
• SEBI promotes transparency and discourages mis-selling by capping commissions and banning upfront charges.

Conclusion

Mutual fund distributors play a crucial role in Indias investment ecosystem. Their commission mainly from trail income rewards them for providing long-term service and support to investors. While commissions vary across funds and AMCs, the trend is moving toward greater transparency, aligning distributor incentives with investor success.

If youre consideringbecoming a mutual fund distributoror investing via one, understanding this structure helps you make informed decisions.

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