What is Trailing Commission in Mutual Funds?

While mutual funds are known to be one of the most cost-efficient ways to invest your money, there are a few different costs associated with the investment. The expense ratio, loads, and transaction charges are among the most popular costs associated with mutual fund investments.But apart from these popular additional costs, there are a few others that most investors are generally unaware of. For instance, do you know what the mutual fund trail commission is? If not, here is everything that you should know about what it is and how it is calculated-

While browsing through mutual fund schemes, you might have seen that every scheme is available in two variants- direct and regular. The NAV of the direct scheme is slightly higher than that of the regular version of the same scheme. Direct investment is when an investor invests in a mutual fund scheme directly through the AMC (Asset Management Company) or fund provider.Regular investment is when an investor uses a distributor, agent, broker, or banker to invest in a mutual fund scheme. The difference in the NAV of direct and regular versions of a fund is mainly due to the commission paid to the intermediary in the case of regular investments.So, this mutual fund commission, also known as the loyalty commission, is a fee paid to the intermediary every year that the investment remains in the fund. For instance, if you invest Rs. 1 lakh in an equity scheme through a mutual fund distributor, the fund house will pay the trailing commission to the distributor every year throughout the duration you remain invested in the fund.

As mentioned above, trailing commission is applicable to regular mutual fund investments. So, if you’ve invested in a mutual fund scheme through an agent, distributor, investment advisor, or banker, the intermediary is probably receiving a trailing commission from your investment.It is also worth noting that the intermediaries are offered an incentive on every investment they bring from the ‘B30’ cities. SEBI has classified Indian cities as ‘T30’ and ‘B30.’ The T30 cities are the ‘top 30’ geographical locations in the country. The B30 or ‘beyond 30’ are cities beyond the top 30.As mutual fund awareness is significantly lower in the B30 cities, the fund houses offer an additional incentive to any investment from these locations.

The mutual fund trail commission varies between equity and debt funds. In equity mutual funds, it can range between 0.20% to 1%. For debt fund investments, this commission can be between 0.10% to 1%.
The trailing commission is calculated as a percentage of the entire investment brought to a fund by a particular intermediary. It is calculated on a daily basis and paid every quarter. So, higher the investment an intermediary brings to a fund, higher is the trailing commission.Investors should also know that the trailing commission is not a hidden expense as it is already factored into the fund's expense ratio. So, it is not an added expense for the investors in any way. The fund house is responsible for paying this commission to the intermediary.However, while the trailing commission is not an upfront cost for the investors, it significantly impacts the returns generated by the fund in the longer run.

The simple solution to avoid this mutual fund commission is to invest in direct funds. When you invest in a mutual fund scheme directly through an AMC, there is no intermediary involved in the process. If there is no intermediary, there is no need for the fund house to pay the commission to any broker or agent.The fund house indirectly collects this commission from the investors. This is the reason why the expanse ratio of the regular plan is higher than that of a direct plan of the same scheme. By investing in the direct plan, investors pay a lower expense ratio, which helps generate higher returns in the longer run.Investors can visit the official website of the fund house or AMC to invest in the direct plan of their preferred schemes. Almost every fund house now has an online portal to allow investors to invest in a mutual fund scheme of their choice digitally.

One of the most critical aspects of being a successful investor is to know all the costs associated with the asset chosen for investment. Now that you know what is trailing commission, how it is calculated, and how to avoid it, you can make smarter investment decisions and generate higher returns.Look for a reputed AMC and focus on factors such as investment objective and risk appetite to choose a mutual fund scheme that can help you fulfil your financial goals and live a more prosperous life.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.