Mutual fund distributors can now earn a trail commission when investors transfer their portfolios to them, as per the circular released by the Association of Mutual Funds in India (AMFI) on 5 March, outlining best practices for the mutual fund industry.
Previously, to prevent “unhealthy competition” among distributors, asset management companies withheld this commission.
Several young distributors were displeased with the previous regulation as it forced investors to redeem their funds before transferring their assets under management to a new distributor. The new distributor would not be able to earn any commission from the mutual fund without this churn.
Distributors – as intermediators between investors and mutual funds – are entitled to a trail commission as long as their clients are invested in the fund. Commissions are decided by asset management companies, based on the duration investors stay in the scheme and the initial amount invested.
Fearing this will open the floodgates and distributors will exploit its circular to lure clients away from smaller rivals, motivated by the commission, the AMFI has mandated a six-month cooling-off period before distributors can earn the trail commission.
The cooling-off period puts the brakes on shifts in assets under management as the new distributor is not entitled to the trail commission if the investor exits within six months. The commission will be based on the lower commission rate between the original and new distributors.
