What Is Trail Commission in Mutual Fund?

Mutual fund investments are not just about picking high returns, but also about understanding the hidden costs that directly impact net returns. According to AMFI, the total commission paid to mutual fund distributors in India surged to ₹21,000 Cr, which is about 40% year-on-year, in the financial year 2024-25.

To help you learn more about the trail commission in mutual funds, this blog will explain how it works, why funds use it, and its regulatory perspective.

What Is Trail Commission in Mutual Fund?

Trail commission is an ongoing payment made to the mutual fund distributor for services provided to the investor by the asset management company. The payment is made yearly until the investment is held; it’s a tiny percentage of the capital investment made by the investors through distributors.

​It is a part of the distributor’s remuneration, usually included in the Total Expense Ratio(TER) of the fund. This continuous payment over the holding period is like an incentive to the distributors who support and advise the investors throughout the period, to make sure they stay invested for the long term.

Trail vs. Upfront Commission

Now, let us learn about trail and upfront commission and how they differ from each other!

Key Difference	Trail Commission	Upfront Commission
Meaning	It is a continuous payment to the distributor, until the investment is held.	It is a one-time lump sum amount paid at the beginning of investment.
Payment	Usually paid annually.	Paid in the beginning.
Charged on	It is charged based on the total investments.	Here, a fixed rate of commission is charged
Embedded Cost	Included in the fund’s total expense.	It is not included anywhere.
Highlight	Long-term support and service	Single transaction
Regulation	Specifically encouraged by SEBI	Banned by SEBI

Typical Commission Rates (Equity vs Debt)

Trail commission on mutual funds differs based on whether it is an equity fund or a debt fund.

In the case of equity mutual funds, the commission typically ranges from 0.20% to 1%. Here, the AMCs offer higher trail commission because equity funds involve higher risk, longer investment horizons, and higher expected returns. Therefore, the distributors put more effort into educating, advising, and servicing equity schemes.

While debt funds, start at much lower rates, it can be between 0.10% to 1%, especially for low-duration debt, the trail commission is minimal. However, some debt funds may have higher commissions if there is credit risk or the duration is long, but still lower in comparison to equity.

How Trail Commissions Is Calculated

Here’s how trail commission is calculated:

= [Number of units held × NAV per unit on given date × (percentage of the commission/100) × No. of days the investment held] ÷ 365 or 366 days

For example, let’s say,  an investor has 1,000 units of a fund. The fund’s NAV on a particular day is ₹100 per share. Trail commission rate is 1% per year. The investor held the units for 30 days.

So the calculation goes like:

(1,000 units × ₹100 NAV × 1% commission rate × 30 days) ÷ 365

(₹100,000 × 0.01 × 30) ÷ 365

₹30,000 ÷ 365 = Approx. ₹82.19

Why Funds Use Trail Commissions

So far, from this discussion, trial commissions may sound a little unfair to the investors. Whereas it is actually useful. Let us learn how!

• Trail commission is to be given to the advisor for reviewing investments and providing advice to the investors.
• It is the cost to keep the investors in successful funds by the distributor or the advisor. It can be really discouraging during bear markets, and these commissions give your advisor a reason to stay motivated for the investors’ success.
• Trail commission is better than giving the distributors a one-time commission in the beginning, like in upfront commission. In such cases, the advisor may try to make the investors buy and sell mutual funds more often, which will lower the returns.
• This also encourages the advisor to focus on long-term growth and not trade in the short-term.

Direct vs Regular Plans (Impact on Investors)

Key Difference	Direct plans	Regular plans
Intermediaries	Here, the investors invest in the fund indirectly through the AMC/fund manager.	Here, the investment plans are introduced by the distributors or brokers or agents.
Commission	No commission is paid here, resulting in a lower expense ratio.	Commission is charged on the total NAV over the period of investment, resulting in a higher expense ratio.
Guidance	Investors don’t receive any guidance, they manage the investment plan themselves.	Investors are guided through the entire investment period.
Investor Profile	Ideal for experienced investors.	Ideal for beginners.
Returns	Higher returns in comparison to regular plans.	Lower returns due commissions.

Regulatory Perspective (India—SEBI Update)

As per the circular published on 22 October 2018 by SEBI, the following mandates have been made:

1. All expenses, including commission to the distributor, are to be paid from the mutual fund scheme within limits set by SEBI, and not from the Asset Management Companies.
2. The fund shall pay the distributors only through trail commission over the investment period. They are not allowed to charge upfront commission.
3. However, upfront commissions are allowed only in the case of SIPs. Distributors can be paid an upfront trial commission of up to 1% each year and for a maximum of 3 years, which requires system integration at RTA’s end. This is only applicable for new investors.
4. Interim rules until the system is ready: Upfront commission is allowed only for SIPs of up to ₹5000/month per investor, which can be up to 1% for 3 years.
5. If there’s any misuse of the SIP carve-out, SEBI shall end the SIP and take action against the involved parties.
6. Costs involved in direct plans cannot be higher than those of the regular plan.
7. No rebate or any other benefit is provided to the investors by the fund, AMCs, or the distributor.
8. Training sessions provided to the distributors should not be misused to provide any sort of rewards or non-cash incentives.

Pros & Cons for Investors

Pros

• The interests of the investors are aligned with the distributors, which is long-term success.
• It encourages the distributors to undertake continuous service and support for the investors.

Cons

• Results in a higher expense ratio over the investment horizon.
• The distributors may focus on continuing the current plan and not capture new opportunities.

Conclusion

So far, it is understood that the trail commission is a continuous fee, which rewards the distributors or the advisors for managing investment plans, ensures continued service and support throughout the investment period. However, it impacts the overall returns for the investors; therefore, they should measure the value received against these costs.

FAQs