MUMBAI: The Sebi dictated 'commission disclosure rule' will become operational from October 1 and if you invest in mutual funds through a distributor, you are likely to know the exact amount of money he is making off you.

Sebi has asked fund companies to disclose in the half-yearly consolidated account statement, the commission they have paid to him during this period, including payouts in the form of gifts and sponsored trips.

Depending on the amount of money you have put into the scheme till date, this could turn out to be a big sum. Under the current practice, this payout to the distributor is neatly concealed, being factored into the scheme's total expense ratio—shown as a certain percentage of the scheme's net assets. The exact sum is not explicitly stated.

However, this amount is now likely to be reflected in your account statement as a standalone figure in rupee terms. Suppose you invest Rs 5,000 every month in an equity scheme through a systematic investment plan (SIP) for ten years. Assuming a return of 12% CAGR, the Rs6 lakh invested will grow to Rs11.62 lakh.

Considering a trail commission of 0.5% and upfront commission of 0.75%, your sixmonth account statements during these ten years will reflect a total commission payout of roughly Rs 28,207 to your distributor.

This works out to 5% of your total investing gains. Additionally, the regulator has asked fund houses to provide in the scheme document an illustration of the impact of expense ratio on the scheme's returns. This will bring out how much the investor would gain by cutting down on the expense ratio.

These measures are being seen as a strong push by the regulator to guide investors towards the direct plan— which comes with a lower expense ratio as it does not incur expenses towards distributor's commission. "The regulator is telling investors to go with direct plans instead of buying through the distributor," says Manoj Nagpal, CEO, Outlook Asia Capital.



Going direct may seem like the prudent option, given the higher savings over a period of time, but investors should put this number in context of what services his distributor is offering. Jayant Pai, head, marketing, PPFAS Mutual Fund, believes, "If investors see value in the services offered by the distributor, I don't think they are likely to grudge this payout."

However, investors may shift to the direct plan if they can do without a distributor and are at ease with a doit-yourself approach it requires. If not, investors may seek the services of a Sebi-registered investment advisor who will offer direct plans while handholding them through the process for an upfront fee. Distributors typically fetch a trail commission of 0.3-0.75% on the value of the investment for each year that the investor's money remains invested with the fund company.

This is calculated on a daily basis as a percentage of the assets under management of the distributor and is paid monthly. This is apart from any upfront commission that is usually paid by the fund company to the distributor out of its own pocket.

The original article could be seen here.