AMFI is likely to allow ‘upfronting of trail in SIPs and ELSS schemes, said two people familiar with the development.
In MF parlance, ‘upfronting’ means that the entire trail commission is paid at the beginning. This was a common practice in ELSS and other closed end funds.
AMFI may allow ‘upfronting’ of trail for SIPs of up to Rs.10,000 per month. However, such ‘upfronting’ would be applicable for SIPs having a minimum tenure of 36 months. Also, it would be paid for a maximum tenure of 36 months even if the tenure of such SIPs exceeds 36 months. Let’s assume that a client invests Rs.5,000 per month for 60 months in an equity fund through SIP then distributor will be eligible to get a commission of Rs.1,800 (1% of all SIPs paid till 36 months).
Similarly, in ELSS, ‘upfronting’ of trail in ELSS would be applicable to the extent of investment of up to Rs.1.50 lakh per year, per PAN. Also, the maximum commission paid under ELSS may be capped at 3%. A rough calculation shows that such commission payouts may go up to Rs.13,500 or 3% of Rs.4.5 lakh ( Rs.1.5 lakh * 3 years).
Earlier, AMFI had issued its best practice circular to AMCs in which it had asked fund houses to discontinue ‘upfronting’ of trail across all schemes. Also, it has put a cap of 1% on upfront commission and given freedom to fund houses to decide trail commission. However, it has to be within the distributable TER.
Last week, AMFI had invited feedback from fund houses before June 12 in order to relax the new commission structure.
