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
Frequently Asked Questions
What is the Mutual Fund Distributor Commission?
Mutual fund distributors play a pivotal role in India's financial landscape. They help investors discover suitable mutual fund schemes based on their financial objectives. They also guide investors through various challenges and help them stay on a consistent investment path. In return for their services, Mutual Fund Distributors earn commissions 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. It incentivises MFDs to offer their expert financing advice and tailored investment guidance to investors, 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 ranges from 0.05% to 2% of the scheme's AUM. It also varies across schemes 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 and vice versa. Thus, the MFD commission, a part of the TER, will also be low when seen as a percentage of the total AUM of that particular scheme.
Regarding the slab rate or market share, an AMC will have different slabs based on the AUM to determine the commission percentage payable. The higher the slab in which an MFD does business, the higher the commission will be.
Types of MFD Commission
Earlier, Mutual Fund Distributors earned commissions based on two models:
linked to the specific transaction, that is, Upfront or Front-end Load, and
linked to their total assets under management (AUM), that is, Trail or Backend Load
Upfront Commission
The transaction-linked commission also called an upfront commission, is paid to a distributor when an investor purchases or sells units of mutual funds.
Note: This upfront commission is no longer applicable.
Trail Commission
SEBI has mandated AMCs to pay commissions to MFDs only through one mode: a percentage of the total AUM. This is known as the Trail Commission and is payable on an ongoing basis based on the distributor's AUM. It is paid so long as a particular investor remains invested in mutual funds through a distributor.
The other types of commission paid to MFDs earlier were based on the cities to which their investors belonged. In other words, AMFI has specified the types of cities from which people invest in mutual funds. These cities 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 with 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 standard commission 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:
The trail commission also depends on the Net Asset Value (NAV) of the Mutual Funds units on a particular date. The formula for calculating trail commission is as follows:
[No.of units X NAV as on the said date X percentage of commission X no.of days invested in the month] divided by 365 (366 days if it is a leap year)
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 in the first month will be calculated as (1000 units Rs.10) 1.5% * (number of days in the month) divided by 365.
If the NAV of that particular scheme has increased to Rs. 15 in the next month, then the commission earned from the second instalment by the MFD will be calculated on the revised NAV. That is, the commission by the MFD from this transaction will be (10,000 units Rs.15)1.5% (no.of days in the month) divided by 365. (on a pro-rata basis)
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.
Add another disclaimer: the commission value for existing assets may be revised, i.e. reduced, based on AUM or AMC discretion.
The commission earned by a Mutual Fund Distributor is directly proportional to the Assets Under Management (AUM) handled by the MFD.
In other words, 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 distributor's current AUM, 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. (approx.)
Note: The commission calculation is just for representative purposes. The actual commission amount depends on the actual transaction and the number of days in the month.
Thus, the higher the AUM handled by an MFD, the higher 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 10000+ MFDs. (Explained below).
When does an MFD receive Commission?
Most AMCs release the MFD commission monthly, while the brokerage structure gets updated every quarter (it also depends on the mutual fund scheme). However, the commission is calculated daily according to the changes in the daily NAV of mutual fund schemes, and the aggregate is paid to the MFDs.
Suppose a Mutual Fund Distributor is individually empanelled across multiple AMCs. In that case, they will receive multiple brokerage reports and commission amounts from all the different AMCs they have to collate to determine the total MFD commission. When done on a monthly routine, this is an uphill task, 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 comprehensive and transparent report is provided to all MFDs doing business with AssetPlus. Our expert backend team specializes in collecting 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:
Adopting cross-selling of different financial products.
Conducting awareness campaigns to attract new investors.
Encouraging stepping-up of investments by existing investors.
Teaching clients the importance of staying invested in the long-term.
Seeking clients to refer them to their friends and family.
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.
Frequently Asked Questions
What is the Mutual Fund Distributor Commission?
The commission or brokerage is the primary source of income for mutual fund distributors, paid by Asset Management Companies (AMCs) for distributing their mutual funds.
How is the commission structure determined for Mutual Fund Distributors?
What is the formula for calculating Mutual Fund Distributor commission?
What types of commissions do Mutual Fund Distributors earn?
How is the trail commission calculated for Mutual Fund Distributors?
What is the role of the ARN code in the Mutual Fund Distributor commission?
When do Mutual Fund Distributors receive their commissions?
What factors influence the commission earned by a Mutual Fund Distributor?
How can you start earning a commission as a Mutual Fund Distributor?
How can Mutual Fund Distributors increase their commission earnings?
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