When you invest in a mutual fund you pay charges. You pay a commission to the person who picks up the cheque from you and sends it to the mutual fund house. Presumably he asks you for your goals, your risk appetite, the level of understanding of markets that you have, then choses a scheme. After that he (increasingly she) does the clerical work of filling up the form, getting you to sign it and then couriers it to the fund house. For this he/she gets between 1 to 4% commission – which is deducted from the investment that you make. Thus you pay him for the services, albeit indirectly.

The fund house collects this money and invests it in the markets – equity or debt as chosen by you. The fund house gets about 2.5% for doing this. Of this about 1.5% is for expenses and 1% is for his fee. THIS he gets year on year – thus as the fund size increases the Asset management company makes more and more money. It hurts the asset management company if the funds are removed – so they make sure that the sales person gets a ‘TRAIL commission.

What really hurts the investor is the Fund management charges – because it is a %age of the corpus!

Sebi should have reduced the asset management charges from a high 2.5% (which was fixed when the aum sizes were Rs. 300-350 crores) – this would have helped the end investor far more than the aboliton of entry loads!

Let us say a customer has done a SIP of Rs. 100,000 a month. The distributor makes Rs. 2000 a month – which is Rs. 24k a year. Say in the 10th year you look at the size of the fund – and it has gone to Rs. 2 croroes – the distributor still makes Rs. 24k a year. How much does the amc make? Well Rs. 200k. When SEBI cuts fees,  where should they have cut fees? You decide.

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  1. Subra,

    Big fan of your posts. However, the last paragraph of this post is positively befuddling.

    If an investor invests 1 lakh a month for 10 years, I sure hope he has more than 2 crores in AUM!

    The average management fee on an equity fund in India is around 1.5%. Of this 0.5% (50 bps) is passed to the distributor as servicing fees or trail fees. And 1% retained by the AMC for expenses and profit.

    In this scenario, at the end of 10 yrs, assuming the SIP is continuing, the distributor will get 24k as entry load commission, and 0.5% of the AUM as trail fees. Not a bad deal! The AMC gets 1% of the AUM as mgmt fees.

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