If you have wondered what are soft commissions here is the answer. There are some legitimate expenses and some not so legitimate expenses. Soft commissions are what sales people call ‘entitlements’. It could be in the form of a contest – the top 100 winners go on an all paid trip to South Africa, Goa, Thailand, Europe – depending on the strength of the currency!
In case of mutual funds it could be charges which are borne by the unit holders, but passed on to the shareholders (or other stake holder) of the fund house (i.e. taken from your NAV and sent to the distributor, broker or employee!). An example would be a broker giving subsidised rental accomodation to a fund house. The brokerage is charged to the NAV but the rent is charged to the amc P&L – this means the NAV reduces, but the amc makes more profit. Such tricks are quite common in the financial services space. So if you are a trustee or a director of a mutual fund you need to be alert. Also if you are an investor!!
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