Do you know Mutual Fund Agents & Distributors makes a lot of money from the commission? You must have seen dedicated desk at banks, where so-called mutual fund agents named as relationship managers are sitting. They are trained to promote mutual fund and insurance products which earns them a hefty commission. They try to sell products without understanding investor need and risk profile. Their sole aim is to increase their revenue income or complete the monthly target.
Please note that any regular fund (except direct fund) where you invest your money you are directly or indirectly paying commission to the agent. Most of the mutual fund agents, sub-brokers and distributors work primarily for the commission, investors interest is a secondary part for them.
If you are mutual fund investor it is very important for you to understand different mutual fund commission rates and how mutual fund agents is doing mis-selling of mutual funds. In this post, we will talk about these aspects.
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Mutual Fund Agents & Distributors Commission
The mutual fund agent commission consists of three parts.
Commission from Client
A first commission is a direct commission paid to the agent for the services. This amount is in between 0.5% to 2%. This commission is not one time it is periodic every time you make an investment, you need to pay this commission. So, whenever you are selecting mutual fund agent figure out this commission against what type of advice you are getting.
Upfront Commission
An upfront commission is a commission paid by the asset management companies to the agent for the first year. The commission rate varies from fund house to fund house and type of mutual fund. The upfront payment for equity mutual fund is higher compared to debt funds.
Trail Commission
Trail Commission is the main source of earning for many mutual fund agents. Trail commission is the commission paid to an agent by asset management companies. This commission is paid to the agent every year till you remain invested in the mutual fund. Trail commission is calculated based on the percentage of the asset under management.
Trail commission is part of the expense ratio of the fund. A Trail commission from equity funds ranges from 0.2 – 1% and for debt fund it in the range of 0.1-1%.
So, mutual fund agent’s income purely depends upon investment amount and fund you select for the investment. The prime reason behind mis-selling of a mutual fund is for earning higher commission income.
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How to Identify Mutual Fund mis-selling?
There are various ways to identify mutual fund mis-selling.
- If your mutual fund distributor is asking you to invest in New Fund offer, probably he is trying to mis-sell mutual funds, or
- If agent is trying to sell mutual fund without understanding your risk profile, it may be case of mis-selling, or
- If you are holding more sectorial and thematic funds in your portfolio which are sold by agent, it may be case of mis-selling, or
- Your agent is trying to sell close-ended fund to you or if your portfolio holding contains majority of close-ended funds compared to open-ended diversified funds, or
- If your portfolio contains majority of schemes which are not performing as per benchmark index, or
- Making a false statement or sharing misleading information about mutual funds, or
- Hiding associated risk of the scheme.
What you can do to save yourself from Misselling?
I hope as an investor you are clear with reason behind mis-selling. Here are few quick suggestions which investor can follow to avoid mis-selling.
- Deal only with SEBI Registered Investment adviser.
- Ensure that investment advisor understand your risk profile and suggest proper plan matching with your financial goals.
- Asking enough questions to determine if the recommendation is right.
- Check how the investment adviser is backing up his/her recommendation. It should be based on the facts and figures.
- Invest only if you are convinced about product and it is matching with your financial goals.
- Prepare direct mutual fund compared to regular mutual funds.
Note – Idea of this post is to make investor aware about mis-selling happening at certain banks on the name of relationship manager. It is not against mutual fund agent or their profession.