A mutual fund (MF) distributor earns his income through two main sources—as fees directly from investors through an upfront payment at the time of investment; and through trail fees from the mutual fund. Trail fees are also known as loyalty bonus and distributors earn them as long as their clients stay invested.
All about trail commission
Trail commission is an annual fee that is levied on the market value of the investment amount. Higher the market value, higher the trail commission a distributor gets.
Similarly, the amount that accrues as trail commission is also dependent on the time horizon of the investment. Larger the time frame of the investment, larger the trail commission. It varies between 0.5% and 0.75% for an equity fund. In case of debt funds, the same is negligible and stands in the range of 0.1-0.5%. The commissions are paid to distributors on a quarterly basis and are generally part of annual expense that MF houses charge their customers.
The impact on investors
It’s tricky to find out the exact impact of the trail commission on individual investments. Here’s why. Every year, your MF scheme deducts a certain percentage of your scheme’s assets as its annual fee. This can be at most 2.50% and 2.25% for equity and debt funds, respectively. These annual fee would include costs of marketing, administration, brokerages, commission as well as the fund management charges. It also includes the trail fees that they pay to MF agents. Since MF investments are a pool of money drawn from several investors, the charges are also pooled in a similar fashion and then are accounted for various purposes. Though your fund house publishes its accounts twice a year, the rule is that lesser the expenses, the better are your returns.
Can I avoid it?
You do not pay trail commission to the agent. Of the total charges that your fund deducts from the corpus, it remunerates the agents whose investors are invested in that fund. The rest is utilized by the fund house for other activities, such as marketing.