Mutual Fund Distribution Commission 2022 – Definition, Charges, and Types
Mutual fund commission
An MFD is paid a commission as a certain percentage of the amount invested. Mutual fund houses fix the commission paid to MFDs on various schemes. For example, a fund house may fix the commission at 1% for a large-cap fund. In this case, if an investor invested a lumpsum of Rs. 10,000 in the scheme through an MFD, the MFD will get a one-time commission of Rs. 100 (1% of Rs. 10,000).
Suppose an investor starts a monthly SIP of Rs. 2,000 through an MFD. In this case, the MFD will get Rs. 20 as monthly commission till the SIP continues.
SEBI allows payment of trail commission only. Earlier, AMCs were allowed to pay upfront commission. But now that has been banned. The trail commission is usually paid in the following month of investment made by the individual.
Every AMC can decide its own commission structure within the upper limit of the expense ratio as defined by SEBI. The commission paid to an MFD is a part of the overall expense ratio of a mutual fund scheme. AMCs usually pay a lower commission for debt schemes and a higher commission for equity schemes.
The above table shows the commission structure paid by L&T Mutual Fund to HSBC Bank (MFD in this case) applicable from 1st Jan 2022 to 31st Mar 2022. The above table shows:
- Usually, liquid funds and overnight funds get the lowest commission percentage
- After liquid funds, usually, other debt funds get a low commission percentage
- The equity funds get the highest commission percentage
SEBI has laid out a commission structure for the top 30 cities (T-30) and other cities (B-30) beyond the top 30 cities. SEBI has allowed an additional total expense ratio (TER) of 0.30% (30 basis points) for inflows from retail investors from beyond the top 30 cities (B-30 cities). The additional 0.30% can be paid as commission to MFDs for business sourced from retail investors from B-30 cities.
Remuneration for mutual fund intermediaries
For mutual fund distribution/recommendation, an intermediary can take one of the two approaches:
Mutual fund distributor (MFD)
An individual can become a mutual fund distributor by fulfilling the eligibility criteria and passing the requisite NISM exam. An MFD can help investors buy and redeem mutual fund schemes. The fund house remunerates the MFD in the form of commission.
Registered investment advisor (RIA)
An individual can become a registered investment advisor by fulfilling the eligibility criteria and passing the requisite NISM exam. An RIA can help investors by recommending mutual fund schemes based on their needs. An RIA charges the investor for their services.
Mutual Fund Distributors
In the financial world, a mutual fund distributor is an individual or entity that assists investors in buying and selling funds. Mutual funds investment commissions are the source of their income. By understanding an investor's situation, risk tolerance level, and financial goals, they are able to recommend a plan suitable for them.
Registered Investment Advisor
The term "Registered Investment Advisor" refers to a person or an organization that provides personal investment advice. Their duty lies in providing their clients with the best financial advice and are registered with Securities and Exchange Board of India(SEBI).
Services provided by MFDs
MFDs get remunerated by AMCs in the form of trail commission for rendering the following services to investors:
- Purchase and redemption of lumpsum mutual fund investments
- Setting up systematic investment plan (SIP), systematic transfer plan (STP), or systematic withdrawal plan (SWP)
- Any other services related to the above services.
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