Understanding the mutual fund distributor commission structure

The awareness in the Indian markets for investments, especially mutual fund investments has increased tenfold in the past years. Mutual fund investments require the contribution of many participants for a seamless investment process. One of the key participants in this ecosystem are the mutual fund distributors and they get a commission for providing their services. Discussed hereunder are the details of this commission expense and related details of the same.

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Who are Mutual Fund Distributors?

Mutual Fund Distributors are individuals or entities that sell mutual fund products to investors on behalf of Asset Management Companies (AMCs). They are licensed and regulated by the Securities and Exchange Board of India (SEBI) and AMFI. Mutual fund distributors can help investors with the process of choosing the right mutual fund based on their investment goals, risk profile, and other factors. At the same time, they can also assist with the paperwork and investment process to make it smooth and hassle-free. 

In return for their services, mutual fund distributors earn a commission from the AMCs, which is typically a percentage of the amount invested by the investor. It’s important to note that while mutual fund distributors can provide valuable guidance and support, they are not financial advisors and may not be able to offer personalized investment advice.

How is the mutual fund commission structured for mutual fund distributors?

The commission for mutual fund commission ranges between 0.1% to 2% of the number of units purchased by the investors. This commission is based on many factors which re highlighted below.

1. The type of mutual fund

Different types of mutual funds offer different commission rates to the distributor. Equity mutual funds may offer a higher commission to the distributor compared to debt mutual funds. This is because equity mutual funds have a higher potential for returns and are considered riskier than debt mutual funds.

2. The distributor’s relationship with the mutual fund company

Mutual fund companies may offer higher -commission rates to distributors who have a good relationship with the company. For example, if the distributor brings in a large amount of business for the mutual fund company, they may receive a higher commission. Similarly, if the distributor has a good reputation in the industry, they may receive better commission rates from the mutual fund company.

3. The distributor’s experience

Mutual fund companies may offer higher commission rates to distributors with more experience and a larger client base. This is because experienced distributors are usually more successful in bringing in new clients and generating more business for the mutual fund company.

4. The size of the investment

The commission paid to the distributor is usually a percentage of the amount invested by the investor. For example, if the commission is 1%, and you invest Rs. 10,000 in a mutual fund, the distributor will receive Rs. 100 as commission. Therefore, the larger the investment, the higher the commission paid to the distributor.

What are the sources of commission for mutual fund distributors?

Mutual fund distributors earn commissions from the mutual fund companies for the services they provide to investors. The two main sources of commission for mutual fund distributors in India are mentioned hereunder. 

1. Upfront Commission

The upfront commission is a type of commission paid to mutual fund distributors in India when they help investors invest in a mutual fund. This commission is paid to the distributor at the time of investment and is a one-time payment. The commission is usually calculated as a percentage of the amount invested by the investor and can range from 0.5% to 1.5% depending on the type of mutual fund and the distributor.

For example, if an investor invests Rs. 10,000 in a mutual fund and the upfront commission is 1%, the distributor will receive Rs. 100 as a commission. The commission is paid to the distributor as a percentage of the investment amount and is deducted from the investor’s investment. This means that the actual investment made by the investor will be Rs. 9,900 in this case.

2. Trailing Commission

Trailing commissions are designed to compensate mutual fund distributors for attracting investors from cities outside the top 30 list. These commissions are divided into two categories:

3. T-30 Cities

In the top 30 cities across India, the commission rate is standardized and varies between 0.1% to 2% depending on the fund house and the type of mutual fund. No additional benefits or bonuses are offered for attracting clients from these cities.

4. B-30 Cities

Cities outside the top 30 list are referred to as B-30 cities. Distributors who source clients from these cities receive an additional incentive. This includes special commissions on each investment made during the first year in addition to the regular commission rate. Along with the standard commission rate, which also ranges between 0.1% to 2%, the distributor earns an extra commission on every investment made during the first year.

Conclusion

Mutual fund distributors are an important link in the investment process and are quite essential for an average investor. The commission structure for mutual fund distributors is unique for every AMC based on their internal guidelines and the incentive structure devised by them to ensure maximum reach of the AMC as well as the benefit provided to the investors. 

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