Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Personal Finance

How Much Are You Paying Mutual Funds in Commissions?

A question on Ask Capital Mind goes like this:

Is there any link from which I can get to know the Trailing commission which the AMC pays to the distributor?

The one simple way to find out what it costs you in commissions is to check the mutual funds’ direct plan versus the regular plan. Check only the growth options because dividends distort the NAVs since the payouts could happen at different times.
Here’s a quick comparison of a few funds mentioned in that question:
 
image
Notes:

  • Since Direct plans were introduced on Jan 1, we don’t have a full year to compare. I have taken the values on Jan 15 (some funds took a few days to create such their direct plans) and compared them to the November 5 value. (Approximately 10 days short of 10 months)
  • The first two funds are ultra-short term plans, which is why the difference as a percentage is small. But you would typically invest a lot more in a debt fund than an equity fund, unless you were a trader. An ultra short term plan could be used to hold emergency funds, be an alternative to longer term fixed deposits, and so on.

Think of the last column as : what am I paying my agent?
Ultra short term debt funds in general pay lesser commissions. However, you might find larger differences in longer term bond funds, dynamic funds, and hybrid funds.
Equity funds have around 0.5% difference in 10 months, which is quite a big difference. For a Rs. 10 lakh portfolio (Rs. 1 million) you are paying Rs. 5,000 in commissions!
Completely tangential: Noticed how the mid-cap funds have delivered negative returns, even though the Nifty has had a positive year till date? That’s how tough this market is.
Big investors, says LiveMint, have figured this out and have moved most of their money to direct funds. It makes complete sense to do this for corporate treasuries, for who the difference could be in crores (for JM Money Manager super, for instance, a Rs. 100 cr. maintained over 10 months sees a difference of Rs. 1.61 crores!)
The other thing is that a financial controller or board member could easily use a commission agent and get kickbacks for investing large amounts. It would make more sense for corporates, especially listed ones, to move their money into direct plans.
Typically the industry has had an implicit subsidy. Rich investors used to have to pay commissions (trailing fees) on their investments, and those commissions would feed agents who could then afford to lose money on the smaller investors (through more detailed hand-holding, education, running around to fill forms etc.). Now that subsidy is gone, because the rich investors are closing down their accounts and going direct.
Mutual fund distributors are either going to have to stop doing business, or attempt to charge investors directly; and I believe investors have to learn to pay, or learn to do things by themselves. Without the implicit subsidy, we don’t have easy choices anymore.

Subscribe to Capital Mind:

To subscribe to new posts by email, once a day, delivered to your Inbox:

Also, do check out Capital Mind Premium , where we provide high
quality analysis on macro, fixed income and stocks. Also see our
portfolio which has given stellar returns in our year, trade by trade
as we progress. Take a 30-day trial:

  • Puneet says:

    So the question remains is:
    How do I go direct?
    How seamless is the process? and can your existing broker slow you down with some #$@$# process?
    Any experiences from the readers would be appreciated.

    • Fairly seamless as I’ve noticed. I’ve moved to SBI MF and it’s not very complex, and neither are Reliance or HDFC.
      Existing broker can’t do a darn thing – you have to sell those units and then put them back into the direct plan. Yes, there’s a tax implication as well.

      • lohit says:

        For HDFC there is a one time hassle of getting an HPIN number, for which you have to go to one of their offices and fill up a form.
        But once that is done, rest of the process is straightforward. You will see your existing units in your online account, and then can switch them to the direct plan.
        I switched all my holdings to direct plans a few months ago, and easily save myself a few thousand rupees a year.

  • Puneet says:

    As an investor, if I’m supposed to sell the units to get into direct mode, them I’m loosing a lot.
    Another thing, online transactions/conversion for MF units with joint holding is not as simple as it seems.
    Deepak, this probably calls for a new post from you I guess 🙂

  • MadMan says:

    JM doesn’t have a damn direct investment feature on their website like most others do. 🙁

  • Jigam Gandhi says:

    Hi Deepak,
    The Cost we pay to mutual fund are much than it is portrayed,
    a) Entry and Exit Load.
    b) Annual Charge.
    c) Many Funds churn the portfolio often , to generate brokerage on trades.
    d) Also We all know Front Running Exist, Which We cant prove. The value of loss on Portfolio is huge or We can say returns are diminished.
    The Problem is more glaring in ULIP and Insurance Plans as our long term returns gets impacted in a big way.
    Regards
    Jigam Gandhi

  • Mira D says:

    The tax part is certainly holding me back.
    But all new inv are direct.

  • Raj says:

    It’s me who posted this question in askmind. Thanks Deepak for taking your time and answering this. Will make the necessary steps to shift the funds to direct very shortly. Thanks.

  • M says:

    There is stupid problem with HDFC Fund for switching from Regular to Direct Plan. It requires either Rs 1000 worth of units or Minimum 50 units irrespective of value of units. For some of HDFC funds, per unit NAV is more than Rs 200 but still ask for 50 units. Really bad customer experience. I don’t know if anyone notices this issue or not.
    Also some funds which got hefty exit loads like UTI RUPS or TIPP, it is better to continue with Regular plans as exit load is around 3-4 % to make switch.

  • KC says:

    Is the commission paid on one-time basis or is this recurring?

  • Bunker Guide says:

    I have all my Mutual Funds investments through ICICIDirect.com for around 5 or 6 AMCs. What will it require for me to go “direct” and then see all my direct holdings on one single page through one single login and password? I dont think it is so simple to do but if someone can throw light it will help.

    • Oh you can’t, because none of the MFs will collaborate. Two ways you can do direct:
      1) Invest directly with MFs and keep the records yourself on a separate site (Value Research, Moneycontrol, ET Online etc have awesme tools)
      2) Invest using the MFSS mode. You pay a small brokerage but you get to see all the funds in your demat account.
      Cheers,
      Deepak

  • Ashish says:

    Hi Sir,
    I really feel that direct plan for a investor who is not regularly tracking Markets doesn’t make any sense. SEBI need to make ETF’s popular because even in Direct Plans expense ratio is very high if you compare that with ETF’s .
    Its like SEBI is saying to investors choose your MF investments on your own because no mutual fund is distributor is going to advise you in direct plan. I believe that’s a recipe for disaster for a investor because he might choose a wrong fund and that will hurt him a lot .
    SEBI need to promote fee based advisory and start promoting ETF’s and that is going to be really beneficial for investors.

    • I agree about getting ETFs popular.
      Most mutual fund distributors don’t seem to give any reasonable advice. They just pitch products where they get commissions. THis is teh case with nearly all bank RMs. Personal advisors should charge a fee!

  • Bharat Desai says:

    Deepak
    1) I found that ICICIPru FMCG has closed without prior notice that is you can not invest now onwards and the NAV of it going down day by day what should I do? Do sebi know this?
    2) The problem ininvesting in MF is you never know the NAV Value at which you invest. If you invest online before 1pm the same day NAV is applicable but the updating of NAV is done by EOD and If you invest online after 1PM the next day NAV value is applicable which also you do not know in short the Investor has to invest blindly without the exact NAV Value. Is there any way to know the exact NAV