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Mutual Fund Distributor Commission Structure 2024

Updated: Apr 2

Table of Content:

  • What is the Mutual Fund Distributor Commission?

  • Types of MFD Commission

  • Mutual Fund Distribution Commission Structure

  • When does an MFD receive Commission?

  • 5 Tips to Earn More Commission as an MFD

  • Conclusion

Mutual Fund Distributor Commission Structure

What is the Mutual Fund Distributor Commission?

Mutual Fund Distributors play a pivotal role in India's financial landscape - primarily helping investors to invest in suitable Mutual Fund schemes and additionally, assisting to explore more investment options. They are responsible for guiding investors through various investment challenges to ensure a smooth & successful financial journey. In return for their services, Mutual Fund Distributors earn a commission as revenue from the products they distribute. 

The commission paid by Asset Management Companies (AMCs) for distributing their Mutual Funds is the primary source of income from this profession. This commission incentivises MFDs to provide informed and tailored investment guidance to investors thus ensuring a mutually beneficial relationship between investors and distributors.


Each AMC has a structure for paying commissions to MFDs which varies for different Mutual Fund categories such as:

  • Equity

  • Debt

  • Hybrid

  • and Index


The overall commission structure broadly lies between 0.1% to 2% and also varies across each scheme based on the AUM and the slab or market share held by a Mutual Fund Distributor in that scheme. 

  • In the case of a Mutual fund scheme’s AUM, if it has a high AUM, its total expense ratio (TER) (calculated as a percentage of the scheme’s average NAV) will be lower than an MF scheme with a lower AUM. Thus, the MFD commission which is a part of the TER will also be low when seen as a percentage of the total AUM of that particular scheme.

  • In terms of slab rate or market share, an AMC will have different slabs as per the MFD’s AUM to determine the percentage of commission payable. The higher the slab in which an MFD is doing business, the higher will be the commission.

Types of MFD Commission

Earlier, Mutual Fund Distributors earned commissions based on two models: 

  1. linked to the specific transaction, that is Upfront or Front-end Load, and

  2. linked to their total assets under management (AUM) that is, Trail or Back-end Load


Upfront Commission

The transaction-linked commission also called an upfront commission, is simply the commission paid to a distributor when an investor purchases or sells units of mutual funds through them.

Note: This upfront commission is no longer applicable.


Trail Commission

SEBI has mandated that commission to MFDs will now be paid only through one mode, which is a percentage of the total AUM. This is known as Trail Commission and is payable on an ongoing basis based on the AUM of the distributor. This commission is paid so long as a particular investor remains invested in mutual funds through a distributor. 


The other types of commission paid to an MFD were based on the tier of cities that their investors belong to. In other words, AMFI has specified the types of cities from which people invest in Mutual Funds. They are divided into two tiers: Tier 1 or T-30 cities are the top cities. 


The Top 30 cities are Mumbai, Delhi, Bengaluru, Pune, Kolkata, Ahmedabad, Chennai, Hyderabad, Vadodara, Jaipur, Surat, Lucknow, Nagpur, Kanpur, Nasik, Indore, Coimbatore, Patna, Chandigarh, Bhopal, Ludhiana, Rajkot, Udaipur, Bhubaneswar, Guwahati, Ranchi, Jamshedpur, Dehradun, Varanasi and Agra.


The Tier 2 or B-30 (Below 30) includes those cities not covered in the top 30 list where there are few investors. If an MF Distributor gets investors from these B-30 cities, they get an additional incentive of 0.1% to 2% of the investment on top of the normal commission they get, for every investment made in the first year.

Note: However, The B-30 commission structure is no longer in effect.

Mutual Fund Distribution Commission Structure


The commission structure earned by an MFD can be determined in two ways:


Trail Commission based on NAV

The trail commission is also dependent on the Net Asset Value (NAV) of the Mutual Funds units on a particular date.


Let’s understand trail commission with an example:

An investor has purchased 1000 units of a Mutual Fund scheme at Rs. 10 per unit for Rs. 10,000 through an MF Distributor. The commission earned by the MFD on this transaction is calculated as a percentage of the total value of the investment. 


That is, if the commission is 1.5%, then the commission earned from this investment on the first month will be calculated as (1000 units Rs.10) 1.5% divided by 12.


If the NAV of that particular scheme has increased to Rs. 15 in the next month, then the commission earned from the second investment by the investor will be calculated on the revised NAV. That is, the commission by the MFD from this transaction will be (10,000 units Rs.15)0.5% 


An additional note to remember is, that while some AMCs have slightly different commission structures between lumpsum and SIP most AMCs follow similar calculation methods.

The only difference between these two investment methods is that the average annual AUM will increase in one shot in case of a lumpsum investment while in an SIP, the AUM increases in a smaller portion on a month-on-month basis. 


Commission based on AUM

The commission earned by a Mutual Fund Distributor is directly proportional to the Assets Under Management (AUM) handled by the MFD. 


To simplify, the AUM of a Mutual Fund distributor is dynamic and affected by two factors:1. The changes in AUM value caused by new investments or redemptions and 

2. The movements in market values (also called, mark to market). 

As a result, the trailing commission which is paid periodically based on the current AUM of the distributor also varies every time. 


Let’s understand this with an illustration.

If an MFD manages a total AUM of Rs. 10 Lakhs and the average commission is 1.5% p.a, then the monthly commission earned on this AUM will be calculated as:

(10,00,000 * 1%) / 12 which is Rs. 1,250.


Thus, the higher the AUM handled by an MFD, the higher will be the commission earned in total and vice versa. The Mutual Fund Distributors partnered with AssetPlus enjoy a higher commission slab as we have a PAN India presence with a network of 8500+ MFDs. (Explained later)


When does an MFD receive Commission?


Most AMCs release the MFD commission every month while some every quarter (it also depends on the mutual fund scheme). However, the commission is calculated every day according to the changes in the daily NAV of mutual fund schemes and the aggregate is paid to the MFDs.


The formula for calculating daily trail commission is: AUM of the scheme * (trail commission p.a/365)


If a Mutual Fund Distributor is individually empanelled across multiple AMCs, they are subject to receive multiple brokerage reports and commission amounts from all the different AMCs which they have to collate to determine the total MFD commission. This becomes a laborious task when done on a monthly routine often limiting the MFDs' time which otherwise can be used to approach new clients and encourage more investments.


A reconciled and consolidated brokerage report serves as a remedy to this recurring challenge. This is a comprehensive and transparent report provided to all MFDs doing business with AssetPlus as we have an expert backend team who specializes in collecting the commission from AMCs and carefully reconciling it to transfer to our MFD partners. With our consolidated report, MFDs can get a reconciled brokerage statement reflecting the true commission earned on their AUM.


5 tips to Earn More Commission as an MFD

As a Mutual Fund Distributor, following these important tips can be a gamechanger in embracing more income opportunities:

  1. Adopting cross-selling of different financial products.

  2. Conducting awareness campaigns to attract new investors.

  3. Encouraging stepping-up of investments by existing investors.

  4. Teaching clients the importance of staying invested in the long-term.

  5. Promoting clients to refer them with their friends and family and also expanding their network by attending seminars and conferences.

Conclusion

Now you have learnt everything about the Mutual Fund Distributor Commission. If you are already an MFD, you have landed in the right place to grow your business. To uncover secret success strategies and scale new heights in your MFD profession, check this out.


If you aspire to become a Mutual Fund Distributor and enhance your career, learn more about how you can become an MFD.

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