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Did you know? The meaning of zero commissions in mutual fund statement

This may be because trail commission has already been paid

By now, you must have received your account statements, or the common account statement, if you are a mutual fund investor. The September-end account statement would have also mentioned the commissions that fund houses paid to your distributors on your mutual fund investments.

Some of you may be surprised to see that the distributor did not receive any commission on some of your investments. Does that really mean your distributors actually got no commission for selling you those schemes? Unlikely. Here’s why.

Closed-end funds

Fund houses pay a certain amount of commission to distributors. Typically, they pay an upfront commission when you invest in funds. Subsequently, they pay a trail fee.

According to rules laid down by the Association of Mutual Funds of India (Amfi: the mutual fund’s industry’s trade body), funds can pay a maximum upfront commission of 1%.

Distributors also earn the trail fee for as long as the investor stays invested.

In March 2015, Amfi had capped the upfront commissions that fund houses pay to distributors to 1%.

Upfronting—or paying in advance—of trail fees was also discouraged. But before it issued this advisory, fund houses used to pay high upfront fees and also pay the trail fees in advance.

This practice was prevalent mostly in closed-end funds that were launched in the years of 2014 and 2015.

According to data by Value Research, nine closed-end funds were launched in 2013, which collected Rs1,860 crore. Many more—55 such funds—were launched in 2014, which in all collected about Rs10,061 crore; and 30 closed-end funds were launched in 2015, which garnered Rs5,156 crore.

Since closed-end funds prevented investors from exiting before the scheme’s tenure got over, most investors would stay invested through the scheme’s tenure. This led to fund houses paying distributors future trail fee in advance.

Commissions

The distributor got a lump sum amount at the start of her investment period. And that’s why, in your mutual fund account statements, in many cases you may not see any distributor commission mentioned against such a closed-end scheme’s name.

However, the account statement that is now meant to disclose distributor’s commission is just supposed to disclose the previous 6 months’ commission. In the case of closed-end funds launched before March 2015, there is a good chance that investors would see zero commissions against these schemes’ names.

Mint has reviewed one such account statement.

What you should do

By capping upfront commissions and compelling fund houses to pay only so much fees as their total expense ratio permits, after accounting for their operating expenses, Amfi and the capital market regulator, Securities and Exchange Board of India (Sebi), restricted the fund houses’ ability to pay high commissions.

A large part of these commissions (in the case of some fund houses) used to come from the asset management company’s own balance sheet.

However, that does not negate the need for the investor to scrutinise closed-end funds closely. Invest in these schemes only if you don’t get a similar proposition in an existing and well-managed fund.

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