"How do you make money if I don't pay you anything?" It's one of the most common questions I'm asked, and it's a fair one. Some people assume a distributor's help is free. Others assume there's a hidden fee somewhere. The truth sits in between, and it's simpler than it sounds. As a mutual fund distributor myself, I think you should know exactly how it works, so here it is, plainly.
The short answer
When you invest through a distributor, you invest in the regular plan of a fund. The fund house pays the distributor a small commission out of the fund's expense ratio. You don't write a separate cheque to the distributor. But you do pay for it indirectly, because a regular plan has a slightly higher expense ratio than the same fund's direct plan.
That's the whole thing. No secret charges. Nothing hidden.
Direct plans and regular plans
Every mutual fund scheme comes in two versions. Same fund manager. Same portfolio. Same stocks or bonds.
The direct plan is bought straight from the fund house or a platform, with no distributor involved. Its expense ratio is lower.
The regular plan is bought through a distributor. Its expense ratio is a little higher, and that difference is what pays the distributor.
Because the costs differ, the NAV of the two plans differs too, and over time the direct plan's return is slightly higher. Our page on direct versus regular plans explains this in more detail.
What "trail commission" means
Distributors are mostly paid through what's called trail commission. It's a small percentage of the money you have invested, paid out over time for as long as you stay invested through that distributor.
SEBI stopped upfront commissions some years ago, so a distributor can't earn a big lump sum just for getting you to invest. They earn gradually, and only while you remain invested. I think that's a healthy rule. It means the distributor does better when you stay invested and your money grows, not when you churn from fund to fund.
Can a distributor charge you separately?
A mutual fund distributor earns through the commission built into regular plans. They shouldn't be charging you a separate advisory fee on top of that for mutual fund distribution. Investment advisers who charge fees work under a different SEBI registration, and they recommend direct plans.
If someone wants a fee and also puts you in regular plans, ask questions. Our post on checking if your adviser is registered shows how to verify who you're dealing with.
So is direct always better?
On cost alone, yes. A direct plan costs less, and over many years that difference adds up. If you're confident choosing funds, keeping track of them, handling paperwork and staying calm when markets fall, direct plans make good sense. I'll say that plainly even though it isn't in my interest.
But cost isn't the only thing that matters. The real question is what you get for the difference, and whether it's worth it to you.
What a good distributor should actually do for you
If you're paying through a regular plan, you deserve real value. A good distributor should help you:
- Work out your goals and how much to invest for each.
- Pick suitable funds across categories, without overlap.
- Handle KYC, nominations, bank changes and paperwork.
- Track and review your portfolio periodically.
- Stay invested when markets fall, instead of panicking.
- Help your family with claims if something happens to you.
That last point about staying calm in a falling market is, honestly, where most of the value lies. One panicked sale in a crash can cost far more than years of commission difference.
What a distributor should not do
Push you into new fund offers every few months. Encourage frequent switching between funds. Promise returns. Sell you things you don't understand. Disappear after you invest.
If your distributor does any of these, that's a warning sign. Our page on how to choose a distributor lists what to look for.
Why the difference looks small but isn't nothing
The gap between the direct and regular expense ratio usually looks tiny on paper, a fraction of a percent a year. But it applies every year, on your whole balance, and over twenty years that small yearly gap compounds into a noticeable sum, especially on a large portfolio, which is exactly why you should know what you're paying and decide whether the help you get is worth it.
I won't pretend otherwise. You can try different assumptions on our SIP calculator to see how cost differences add up over time.
A common myth about distributors
Some people believe distributors earn more by pushing particular funds. Under the current rules, commissions within the same category are broadly similar across fund houses, and they're disclosed. There's less room for that kind of bias than there used to be.
Still, ask. A good distributor won't mind. They'll explain why a fund suits you, not just that it's "good".
How to check what you're paying
Your account statement shows the plan you hold, regular or direct. The fund's fact sheet shows the expense ratio for both plans. Compare them and you'll see the difference.
Under SEBI rules, your consolidated account statement also shows the commission paid to your distributor on your investments. It's right there in black and white. Our page on the consolidated account statement explains how to get one, and our page on expense ratio explains the cost itself.
Can you switch from regular to direct?
Yes. You can switch a regular plan to the direct plan of the same fund. But it counts as a sale and a fresh purchase, so there may be tax on gains and an exit load if you're within the exit-load period. Work out the cost before you switch.
And be honest with yourself about whether you'll manage things well on your own. Our page on switching mutual funds explains how it works.
How I think about it
I'd rather you understood exactly how I'm paid than assumed my help is free. If you'd like to invest directly and manage things yourself, that's a perfectly good choice, and I'll tell you so. If you'd prefer someone to handle the work, keep you on track and be there when markets get rough, that's what the regular plan pays for.
What matters is that the choice is yours and it's an informed one. Either way is fine.
Questions worth asking any distributor
- Are you registered with AMFI? What's your ARN?
- Will my investments be in regular plans?
- How often will you review my portfolio with me?
- What will you do if markets fall sharply?
- Who do I contact if you're unavailable?
Clear, honest answers to these tell you a lot about who you're dealing with.
Quick summary
- Distributors are paid by fund houses through regular plans.
- You pay indirectly, through a slightly higher expense ratio.
- Commission is trail-based, earned only while you stay invested.
- Direct plans cost less but need you to do the work.
- Your CAS shows exactly what commission was paid.
If you have questions about what you're paying on your current funds, I'm happy to go through your statement with you. Myfolios is an AMFI-registered mutual fund distributor (ARN-145870) working from Indore since 2014. Get in touch.
