I was reading the blogpost introducing coin - Zerodha direct mf platform. How much do mutual fund distributors earn if they get to keep making trail commission every year from my investment for as long as I have invested? They must be making a killing isn’t it?
Why isn’t anyone trying to create awareness about direct MF if it can save so much money for retail investors?
Check this commission disclosure link on AMFI website. The biggest earners FY 15/16 are (the list has over 500 distributors)
All distributors together, a massive Rs 3650 crores was paid out as commissions last year on mutual fund investments to distributors. Only retail investors use distributors, so yeah all of us together have paid this massive amount.
What is also ridiculous is that companies like ICICI direct charge an additional transaction fees over and above the commission they earn for distributing the mutual funds. The money earned from these transaction fees would be over and above the Rs 111 crores ICICI securities would have earned selling MF.
Check this link on ICICI direct. Rs 100 to Rs 500 as additional transaction fees! 
ICICI bank and others have also shared a link on typical commissions they earn for selling mutual funds. Check this link.
Check out the commission paid if clients are outside the top 15 cities (B-15), upto 2.75% upfront and upto 1.25% as trail commission every year. No wonder no one is creating awareness about direct mutual funds. This seems like a great way for distributors to earn without the client ever getting to know that so much money from his investments are going back as commission not just upfront but every year. Since no money is directly taken, clients don’t get to know, and ignorance is bliss.
Within 2 months of my exposure to financial world back in 2014 , I switched to direct mutual funds for ELSS and Liquid investments. Since then , I have always recommended anyone who asked me , to invest in direct MFs, citing the same reasons as mentioned by you.
When zerodha launched regular MFs platform, I was kinda disappointed as it seemed like Zerodha was also going for those trail commissions. Great to see that Zerodha managed to understand it from retail trader’s end and launched COIN.
That’s what I like about Zerodha, not that they are perfect, but are constantly innovating and giving you more and more surprises. I was thinking over switching all my fund capital from their earlier platform since the differences are huge in direct which I ignored. But finally they have launched direct also.
When people say mutual fund commission are borne by the investor is misleading. Nobody understands the difference between direct and regular plans of mutual funds. The expense ratio in regular plans is higher , so the investor thinks he is paying some part of it as commission. It’s true but if you look at the NAV of a direct plan , it’s always higher than the regular plan. When you do the math, you wouldn’t find any huge mismatch . There might be negligible difference but you would be getting professional advice when going through a distributor.Imagine you choose a wrong fund on your own to save 0.1 -0.2 % and lose considerable amount of your wealth.
Not sure you understand this correctly, “Direct is ALWAYS cheaper” and that’s a fact. Here are the three of the biggest funds in their categories and their expense ratios.
| Scheme | Type | Regular Expense Ratio | Direct Expense Ratio | Difference |
|---|---|---|---|---|
| HDFC Prudence | Hybrid | 2.26% | 1.16% | 1.10% |
| HDFC Equity Fund | Equity | 2.07% | 1.16% | 0.91% |
| Birla Frontline Equity Fund | Equity | 2.15% | 1.06% | 1.09% |
Also. here is a graphical illustration in case you missed the point
The NAV of a direct fund will remain lower than the NAV of a direct fund and you miss out on the compounding effect
That’s not true. According to SEBI Registered Investment Advisor regulations, distributors can no longer give advice. There are SEBI RIAs specialized to give advice and are minutely monitored by and answerable to SEBI. Any advice given by a distributor may be biased.
Mutual fund distributors earn their income primarily through commissions paid by mutual fund companies for selling their products. This compensation model includes upfront commissions, trail commissions, and sometimes incentive bonuses.
Upfront commissions are paid when an investor first purchases a mutual fund. Although they vary, these charges usually take the form of 0.5% to 1.5% of the total investment. For instance, the distributor may receive an upfront commission of ₹500 to ₹1,500 if a client contributes ₹1,00,000.
These are usually a small percentage of the fund’s value, typically around 0.5% to 1% annually. Therefore, if an investor’s fund value is ₹1,00,000, the distributor might earn ₹500 to ₹1,000 each year.
The actual earnings of a mutual fund distributor can vary significantly based on the size of their client base, the types of funds they sell, and the duration their clients stay invested. Distributors who manage larger portfolios or those with clients holding investments over a longer term tend to earn more through trial commissions.
Some distributors may also receive incentive bonuses from mutual fund companies for achieving certain sales targets. However, these are not guaranteed and vary widely depending on company policies and market conditions.
While the earning potential for mutual fund distributors can be substantial, it is important to note that it involves significant effort in client acquisition, portfolio management, and ongoing customer service to maintain and grow their business.
