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 .
Note : The trail commission is deducted out of NAV anyways , whether you invest directly or through some broker . If you invest directly the trail commission is pocketed by AMC itself .
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||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|
|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|
|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||Debt||0.00 to 0.75||0.10 to 0.30|
|ING Investment||Liquid||0.00||0.05 to 0.20|
|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|
|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|
|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|
|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|
|Morgan Stanley||Debt||0.00||0.20 to 1.00|
Source : FundsIndia.com
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)
- 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.
Look at this spreadsheet describing the trail commission at different returns from investments , thanks to Shiva
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 .