Understanding Different commissions on Mutual funds

Today we will see how your commission is earned from mutual funds. This is important for a customer to know because based on this you can compensate your agents. Its important to understand what kind of advice you should demand from agents because they earn money out of your investments. You can decide if the advice given by your mutual fund agents is worth the money you are paying or not. Apart from this you should know how mutual funds compare with other financial products, I found out that over a long-term mutual funds are the most attractive products from commissions point of view, even better than ULIP’s and Endowment/MoneyBack policies. However in current scenario generally investors do not remain invested in one single financial products for long , so it might not be 100% true.

There are 3 components of commissions earned by Mutual Funds Agents

1) Commission from Client

This is the commission which customer pays to the agents for their service. It generally ranges from .5% – 2% . It should depend on the quality of advice your agent provides . This is the commission you will pay to agent every time you do the investment . After the abolision of entry loads, client has to compensate the agents directly. So if you invest Rs 10,000 per month and your agent charges commission @1% , he gets 1% of 10,000 = Rs 100 every month. This is the amount you have to pay agent apart from Rs 10,000 Investment.

2) Upfront Commission

Upfront commission is the commission paid by AMC (mutual funds company) to agent in the first year. The commission varies from one AMC to another and varies across different categories of mutual funds. Equity Mutual funds generally give higher upfront commissions,whereas debt funds give lower commissions. let us see an example of this commission; if upfront commission is 0.5% , and your SIP is Rs 10,000 per month , then upfront commission would be 0.5% of 10,000 = Rs 50 per month , ie : Rs 600 for 1st year . So even if you dont pay your agent any commission he will earn upfront commission from AMC .

3) Trail Commission

This commission is mostly hidden from general public. This is most important part of commissions and main earning of mutual funds agents in long run. Trail commission is the commission paid to agents by AMC in subsequent years. The most important point you should know is that trail commission is percentage of total AUM (total worth of customer) . So if your total Worth of investments in a particular year is Rs 10 lacs and trail commission is 0.5% . AMC will pay 0.5% of 10 lacs = Rs 5,000 to the agent. This is the commission paid to your agent out of your money, Its adjusted from NAV. Which means that if an agent has 100 clients who have Rs 10 lacs of investments (current worth , not investment) with an AMC, then total AUM (assets under management) of that agent is total worth of all the customers, which is Rs 10 lacs X 100 = Rs 10,00,00,000 (10 crores) . So he will get 0.5% of 10 crores = Rs 5 lacs .

So many Banks and very big agents who have AUM’s like 1,000 crores invested through them will earn 5 crores of income per year (0.5% trail commissions) . This is one of the big reasons why many agents entice customers to shift their current investments to them (Read this) . So now you know how ICICI , Kotak and other platforms which provide mutual funds investing through demat accounts make huge money. This is not to say if its right or wrong. Commissions are every where and you have to pay the price of transactions, It’s just to tell you how our commission on financial products are structured and how commissions from financial products make huge money in commissions. Most of the financial planners who make you invest through them also make good money out of the commissions over long run. This makes sense also most of the times because then they can service you better and track your investments every year properly .

Why it’s Important to know about Trail Commissions ?

For a client, its important to know about trail commission and other commissions, so that he is not a victim of Misselling , It might happen that your agent is pushing you to buy a mutual fund which pays higher Trail commission . For example Birla Sunlife can pay Trail commission up to 0.75% , where as SBI pays maximum 0.4% . That means agent will get much more trail commissions in later years if you buy Sun Birla Life Mutual funds from him, in which case he will try to encourage you to buy higher paying Trail commission products , irrespective of mutual funds which are suitable for you . As a customer knowing mutual funds commission structure will make sure you evaluate the whole situation and figure out if you are being mis-sold a mutual funds or not !! .

Also read : Agents Commission on Insurance Policies

Mutual Funds Commissions

Mutual Fund Company Asset Class Upfront Fee (Percentage) Trail Commission (Annual Percentage)
AIG Equity 0.40 0.40
AIG Debt 0.00 0.05 to 0.40
Birla Sunlife 0.40 to 1.75 0.20 to 0.75
Canara Robeco Equity 0.75 to 1.25 0.50 to 1.00
Canara Robeco Debt 0.00 to 1.00 0.25 to 1.00
Canara Robeco Liquid 0.00 0.05 to 0.40
Canara Robeco Guilt 0.50 0.50
DBS Cholamandalam Equity 0.75 to 2.75 0.40
DBS Cholamandalam ebt 0.00 to 1.00 0.10 to 0.35
DBS Cholamandalam Liquid 0.00 0.05 to 0.20
DBS Cholamandalam Gilt 0.00 0.40
Fidelity Mutual funds Equity 0.50 to 2.00 0.50 to 0.75
Fidelity Mutual funds Debt 0.00 to 1.25 0.10 to 0.50
Fidelity Mutual funds Liquid 0.00 0.05 to 0.30
Fidelity Mutual funds Gilt 0.50 0.00
HDFC Mutual Funds 0.50 to 0.90 0.20 to 0.80
ING Investment Equity 0.50 0.50
ING Investment Debt 0.00 to 0.75 0.10 to 0.30
ING Investment Liquid 0.00 0.05 to 0.20
ING Investment Gilt 1.00 0.00
IDFC 0.50 0.10 to 0.80
JM Financial 0.50 to 1.00 0.05 to 0.75
Kotak Mahindra 0.05 to 0.65 0.40 to 0.50
Mirae Asset 0.50 0.50
Principal Pnb Equity 0.65 to 3.25 0.40
Principal Pnb Debt 0.00 to 0.75 0.05 to 0.65
Principal Pnb Liquid 0.00 0.05 to 0.10
Principal Pnb Gilt 0.25 0.10
Quantum Mutual funds 0 0
Reliance Capital Equtiy 0.40 to 2.75 0.30 to 0.50
Reliance Capital Debt 0.00 to 0.90 0.05 to 0.75
Reliance Capital Liquid 0.00 0.05 to 0.35
Reliance Capital Gilt 0.00 0.50 to 0.60
SBI Mutual funds 0.40 0.40
Sundaram BNP Paribas 0.60 to 1.75 0.20 to 0.40
UTI 0.75 to 1.50 0.10 to 0.75
Edelweiss Equity 0.00 0.35 to 0.75
Edelweiss Debt 0.00 0.05 to 1.00
Edelweiss Liquid 0.00 0.05 to 0.20
Edelweiss Gilt 0.00 0.25
Franklin Templeton Equity 0.50 to 2.50 0.40
Franklin Templeton Liquid 0.00 0.05 to 0.35
Franklin Templeton Debt 0.00 to 0.80 0.05 to 0.60
Franklin Templeton FoF 0.30 to 0.50 0.25 to 0.38
HSBC Equtiy 0.00 to 0.50 0.40 to 0.50
HSBC Debt 0.00 to 0.80 0.05 to 0.60
HSBC Guilt 0.00 0.30
Morgan Stanley Equity 0.65 0.50
Morgan Stanley Debt 0.00 0.20 to 1.00

 

Source : FundsIndia.com

Example

Here is a hypothetical example where an agent has single customer .

  • SIP per month : Rs 10,000
  • Commission paid to Agent by Customer : 1% (for every payment)
  • Upfront Commission paid to Agent by AMC : 0.5% (for First year)
  • Trail Commission paid to Agent by AMC : 0.5% (for subsequent years)

year Investment AUM (With 12% annual growth in Value)
Customer commission (1%)
AMC commission (Upfront & Trail = 0.5%) Total Commission (Customer + AMC)
1 120,000 0 1,200 600 (upfront) 1,800
2 120,000 134,400 1,200 672 1,872
3 120,000 284,928 1,200 1,425 2,625
4 120,000 453,519 1,200 2,268 3,468
5 120,000 642,342 1,200 3,212 4,412
6 120,000 853,823 1,200 4,269 5,469
7 120,000 1,090,681 1,200 5,453 6,653
8 120,000 1,355,963 1,200 6,780 7,980
9 120,000 1,653,079 1,200 8,265 9,465
10 120,000 1,985,848 1,200 9,929 11,129

 

Note

  • Make sure you do not get carried away by the numbers alone , There are operational costs , taxes , overheads to service clients as well .
  • The clients will be liquidating their investments over the years and moving to other mutual funds or Agents , which might impact the commissions for agents.

Conclusion

You will see that the general perception that mutual funds product are very cheap products are not correct . Once a mutual funds builds a good client base who sticks to him , the commissions on mutual funds will be much more than Insurance .

335 CommentsAdd Comment

  1. Deepak Tewari

    Dear sir suppose I do not have arn no and I work for any mutual funds distributor who have all the mutual funds authorisation to sale. I work with them as sub distributor can they stop my trail commission if I work for one year and after that I do not work Please reply

  2. Sumit

    Sir how must the agent collect Commission from client? Is it by way of cheque? or any other mode? What is the procedure exactly? Thanks in advance.

  3. Prashanth

    We can act as an sub-distributor to individual firms which has tie up with all mutual funds.. This way would be easy instead of getting enrolled with each MF. Manish your thoughts on this???

  4. Srini

    manish
    Once I get my ARN # should I approach indivvidual AMC seprately and enroll with each and every AMC to sell their products? or the investors can use my ARN # in any AMC so that I get my Commission…………

    Please explain how it works.

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