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Mutual Funds

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.

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