7.5 Revenue for a Mutual Fund Distributor

The Full Trail Model

Since October 2018, SEBI requires that all commissions and expenses payable from a scheme be paid only as trail commission. Upfront commission — a payment based on the amount invested, received at the time of investment — is no longer permitted.

The reason is direct. Upfront commission rewards the act of investing, so the way to earn more was to move money again, and again. Trail commission rewards assets staying invested, so the way to earn more is for the investor to remain and prosper. The change realigned the distributor's economic interest with the investor's.

How Trail Commission Works

Trail commission is a percentage per annum of the daily net assets attributable to the distributor's investors, accrued daily and typically paid monthly.

Worked example. A distributor's clients hold INR 4 crore in a scheme paying trail of 0.80% per annum.

Annual trail = 4,00,00,000 x 0.80% = INR 3,20,000
Monthly      = 3,20,000 / 12       = approx INR 26,667

Three properties follow, and all three are examinable:

1. It continues as long as the investor stays. No fresh sale is needed.
2. It grows with the assets. If markets rise 15%, trail on that book rises about 15% with no new business.
3. It stops on redemption. A distributor who churns clients out of schemes destroys the very asset producing the income.

The long-run implication is that a distributor's book behaves like an annuity that compounds — provided investors are retained. Retention, not acquisition, is the economics of the business.

Where the Money Comes From

Commission is paid by the AMC out of the scheme's expenses, within the regulatory expense ceiling. It is not an additional charge levied on the investor's transaction.

This is what creates the difference between plans:

The gap between the two expense ratios is broadly the commission cost. An investor in a regular plan is paying for distribution through a slightly lower NAV growth each year, which is precisely why the disclosure obligations in the next section exist.

Trail Rates Vary

Rates differ by scheme category and by AMC. Broadly:

• Equity schemes carry higher trail than debt schemes, reflecting higher expense ratios.
• Liquid and overnight schemes carry very low trail, because their expense ratios are minimal.
• Index funds and ETFs carry little or none, since their expense ceilings leave almost no room.
• Larger schemes generally pay lower trail rates, because expense ratios fall as assets grow.

This variation is exactly why the disclosure requirement covers competing schemes: differing trail rates create differing incentives between products that may be otherwise similar.

The B-30 Incentive

To encourage penetration beyond the top 30 cities, AMCs were historically permitted to charge an additional 30 basis points of daily net assets where new inflows from B-30 investors met specified thresholds, and to pass that to distributors.

The history matters because material still in circulation describes the old regime as current:

• March 2023 — SEBI suspended the B-30 incentive, following concerns about splitting of transactions, churning and inconsistent computation across AMCs.
• September 2025 — the SEBI Board approved a replacement incentive in a different form, targeted at genuinely new investors rather than at asset volume; the enabling change to the regulations followed later in 2025.
• The reinstated structure provides 1% of the first investment, subject to a cap of INR 2,000, for a lump-sum investment, and 1% subject to the same cap for a systematic investment plan, with the incentive conditional on the investor remaining invested for at least one year.
• Eligibility covers new individual investors from B-30 cities and, importantly, new women investors from any city, including the top 30.
• Implementation was originally set for 1 February 2026 and was extended to 1 March 2026 after AMCs reported operational difficulty in building the systems required.

The redesign is deliberate: a flat per-investor cap removes the incentive to split or inflate transactions, because the reward attaches to bringing in a new investor rather than to the size of the money, and the one-year condition removes the reward for an investment that is redeemed quickly.

Transaction Charge

A transaction charge may be deducted from the investment amount and paid to the distributor:

The charge is deducted from the amount invested, so units are allotted on the net figure, and it must be disclosed in the account statement. Distributors may opt out of receiving it, and many do. It is a small and shrinking part of distributor revenue compared with trail.

GST

Distributor commission attracts GST at 18%. A registered distributor charges GST on its invoice; where the distributor is unregistered, the AMC accounts for it under the reverse charge mechanism. GST on commission is borne within the scheme's expense framework rather than charged separately to the investor.

What Distributors Cannot Earn

• No upfront commission from scheme assets.
• No fee from the investor for advice, which requires registration as an investment adviser.
• No rebating of commission to the investor.
• No payments other than trail on account of a change of distributor, including incentives — a point covered in section 7.7.