The Importance Of Knowing Fund Agents' Commissions

It is very important to understand the different rates of commissions that accrue to Mutual fund agents earn because customers can then compensate for them accordingly. Besides, customers can also get to know the type of advice the agents have the responsibility of providing because they earn money from the agents' investments.

A mutual funds agent's commission comprises three parts: client's commission, upfront commission and trail commission.

Commission from client:

A customer pays his agent a commission for providing his service and the amount is usually 0.5% to 2% of the investment. The client should base his commission's worth on the quality of advice his agent provides. This is a recurring commission and the agent gets paid every time the client makes his investment.

For instance, if a person invests Rs 10,000 every month and his agent's commission is 1%, the latter gets Rs 100 every month. Therefore, the client will be parting with Rs 1,100 every month.

Upfront Commission:

This commission is paid by the asset management company to its agents in the first year and varies from one company to another and is different across the entire range of mutual funds. Equity mutual funds generally pay upfront commissions, while debt funds pay at lower rates.

Trail Commission:

Investors are not usually aware of this commission, but it is the most important component of commissions and the primary earning of mutual funds agents. Asset management companies pay trail commissions to agents in successive years.

They are a percentage of the total assets under management of an investor. Therefore, if a person has investments worth Rs10-lakhs in a particular year, and the trail commission is 0.5%, the company will be paying an agent Rs 5,000, the amount coming from the investor's money.

An agent usually has lots of clients under his fold and this means the amount he can earn from trail commission can be quite significant.

Moreover, as trail commissions are deducted out of net asset values (the value of the assets minus the value of their liabilities), it does not affect the agent whether a client invests directly or through him. If investments are direct, the trail commission goes to the company automatically.

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