Choosing between regular and direct mutual fund plans significantly impacts the cost of investing, primarily due to distribution commissions embedded within the expense structure of regular plans. An analysis of data from the Association of Mutual Funds in India (AMFI) reveals that mutual fund distributors collectively received an estimated ₹27,335 crore in commissions during the financial year 2024-25.
Understanding the Commission Structure
The fundamental distinction between regular and direct mutual funds lies in the involvement of a distributor and whether a commission is built into the scheme's expenses. While investors often prioritize returns and expense ratios, the choice between these plan types directly affects the overall investment cost.
According to an analysis by 1 Finance Magazine, based on AMFI's commission disclosures, this substantial commission pool is not charged to investors via a separate bill. Instead, it is paid from the mutual fund scheme's expense ratio, which is deducted daily from the fund's Net Asset Value (NAV). This means investors don't receive an explicit invoice for distribution costs, making these charges less visible.
Concentration of Commission Earnings
The report highlighted a significant concentration of commission earnings: approximately ₹21,106 crore, or 77.2% of the total commission pool, went to just 3,158 distributors. This group represents a mere 1.5% of the estimated 2.06 lakh distributors on AMFI's register. The remaining ₹6,229 crore was distributed among about 2.03 lakh smaller distributors.
This concentration underscores how commission revenue scales with the assets under management and the reach of a distributor's network.
Regular vs. Direct Mutual Funds: Key Differences
For investors, the key operational differences are:
- Distributor Involvement: Regular plans involve an intermediary, while direct plans are purchased directly from the mutual fund house.
- Distribution Commission: Regular plans include commission paid from scheme expenses; direct plans do not.
- Expense Ratio: Generally, regular plans have a higher expense ratio compared to direct plans.
- Investment Route: Through an intermediary for regular plans; directly with the fund for direct plans.
- Investor Support: Distributors can offer assistance with transactions and fund selection in regular plans, whereas direct plan investors manage investments themselves.
- Impact on NAV: Expenses, including distribution costs, are deducted from the NAV in regular plans, leading to a higher cost structure.
A lower expense ratio in direct plans means less of the scheme's assets are used for operational costs. However, the choice often depends on whether an investor requires the advisory or distribution support offered by an intermediary.
Where Do Commission Monies Go?
The distribution commission pool is heavily concentrated among larger channels:
- Banks and Bank-Associated Brokers: Received ₹6,330 crore.
- Wealth Managers and Corporate Distributors: Received ₹11,629 crore.
- Fintech Platforms: Received ₹458 crore.
- Disclosed Individual Distributors: Received ₹2,689 crore.
Among disclosed entities, the disparity is stark. The 50 bank and bank-associated channels averaged ₹126.60 crore each, significantly higher than the ₹1.82 crore average for the 1,474 disclosed individual distributors.
What Should Mutual Fund Investors Check?
Before investing, individuals should consider three crucial points:
- Compensation Model: Understand how the platform or person assisting with investments is compensated—through commissions, fees, or both.
- Direct Plan Availability: Verify if a direct plan of the same mutual fund scheme is available.
- Intermediary Type: Confirm whether the intermediary is a mutual fund distributor or a SEBI-registered investment adviser, as their regulations and payment structures differ.
The existence of commission data does not inherently make regular plans unsuitable. Instead, it underscores the importance for investors to fully comprehend what they are paying for and how that payment is structured before making any mutual fund investment decisions.