MFs hike trail commissions by up to 50% for big distributors in NFO push

Fund houses are doling out higher trail commissions to big distributors and wealth management firms to boost NFO mobilisation. Asset managers have collected nearly Rs 20,000 crore of inflows via the NFO route in the past six months.

Typically, distributors get around 70-75 basis points (100 bps equals to 1 per cent) of trail commission, but in the past few months they are getting slightly higher trail commissions at around 100-110 bps, say industry participants.

Industry participants say this is prompting large distributors to aggressively market new offers launched by the Rs 34-trillion MF industry. The recently-concluded ICICI Prudential Flexicap Scheme NFO had collected around Rs 10,200 crore--highest ever by any active equity funds.

“Higher trail commissions are being given to distributors who are willing to commit large investments in NFOs. In the last six months, we have seen banks and wealth management funds aggressively selling NFOs along with few large distributors who have pan India presence,” said a source in the industry.

Trail commissions are directly paid by the fund houses and distributors keep getting them as long as an investor remains invested in the scheme. In the last few years trail commission has gained prominence as regulators banned upfront commission.

With the rise in the markets and strong historical performance of equity funds have propelled investors to look at NFOs and other equity offerings more favourably.

On an average large-cap funds have given returns of 45 per cent, while mid- and small-cap funds have given even higher returns of 74 per cent and 105 per cent respectively in the last one year.

Aggressive selling of the funds by banks and switches from one fund to NFO are also the factors driving the sales of NFOs.

“Several distributors also advise investors to move their money from their existing scheme to NFOs to get slightly higher commission,” said a marketing head of the leading fund house.  

Generally, the schemes which are new in the offering have higher total expense ratio (TER) and fund houses can give higher trail commissions. But as the size of the fund increases the TER starts coming down.

The data from Association of Mutual Funds in India (Amfi) shows that distributors received gross commission of Rs 6,617 crore from the asset management industry in FY21 compared to Rs 6,148 crore in previous year, a growth of 7.63 per cent.