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An upfront commission is paid to the broker or mutual fund distributor on the same month as the purchase of the mutual fund investments. A trail commission is paid every year until the investment is withdrawn.[1]
What is Trail Commission?
A mutual fund commission is a yearly fee paid to the intermediary as long as the investment is held within the fund. For example, if you invest INR 1 lakh in an equity scheme through a mutual fund distributor, the distributor will receive trailing commission payments from the fund house annually for the duration of your investment in the fund.
The mutual fund trail commission varies depending on whether it is an equity fund or a debt fund. In equity mutual funds, the commission typically ranges from 0.20% to 1%, while for debt funds, it can be between 0.10% to 1%. This commission is calculated as a percentage of the total investment brought into a fund by a specific intermediary. It is calculated daily and paid quarterly. Therefore, the higher the investment an intermediary brings to a fund, the higher the trailing commission they receive.
It’s important for investors to understand that the trailing commission is not an additional or hidden expense, as it is already incorporated into the fund’s expense ratio. The responsibility for paying this commission lies with the fund house, which compensates the intermediary accordingly.
What is Upfront Commission?
The upfront commission refers to a single payment made by an Asset Management Company (AMC) to a distributor upon selling a mutual fund scheme to an investor. However, in 2018, the Securities and Exchange Board of India (SEBI) eliminated the practice of paying upfront commissions to mutual fund distributors.
SEBI has mandated that there should be no upfront commission or the practice of upfronting trail commission when it comes to distributor payouts. Instead, the industry must transition to a model where commissions are solely based on trail commissions.
Per the directive, AMC must adopt a commission structure based solely on trail commissions.[2]
Reference
- https://www.sebi.gov.in/legal/circulars/mar-2019/review-of-commission-expenses-disclosure-norms-etc-mutual-fund_42468.html
- https://www.sebi.gov.in/sebi_data/meetingfiles/oct-2018/1539576106009_1.pdf
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