Mutual funds' grouping Amfi today announced that upfront commissions paid to distributors selling schemes would be capped at one per cent from April 1.
The decision comes against the backdrop of concerns raised by market regulator Sebi about high commissions being doled out to mutual fund agents.
Introduction of cap on commissions would help ensure a level playing field and curb instances of exorbitant payments.
At present, there is no limit on upfront commission and some fund houses pay upfront commissions of up to eight per cent to their distributors for selling a MF scheme.
In a circular issued today, Association of Mutual Fund Industry in India (Amfi) said that upfront commission should not exceed 100 basis points (one per cent) for the first year.
"Further, upfront commission shall not exceed distributable TER (Total Expense Ratio) of the scheme if the same is below 100 basis points," it added.
However, additional incentives provided for distributors in smaller towns would be exempt from the cap.
One of the major concern has been that the practice of paying high commissions is detrimental to the interests of small players in the domestic mutual industry, where big entities account for substantial business.
According to Amfi, there would be exemptions for commissions with regard to schemes sold in smaller towns.
In mutual fund industry small towns are generally referred to as B15 (or beyond top 15 cities).
The guidelines would be applicable for "all open ended, close ended schemes as well as interval schemes, including liquid schemes, debt schemes and equity schemes etc, but would exclude exchange traded funds," the circular said.
Systematic investment plan (SIP) and systematic transfer plan (STP) for which requests were registered before April 1 would also be exempted from the cap.
There are a total of 45 mutual funds in the country and their total Average Asset Under Management currently stands at over Rs 12 lakh crore.
