Trail commission is the ongoing payment a mutual fund distributor earns for as long as an investor stays invested through them. Since a SEBI circular dated 22 October 2018 (SEBI/HO/IMD/DF2/CIR/P/2018/137) it is the only commission model allowed on most mutual fund purchases. Upfront commission, a lump paid at the time of sale, was banned. A later circular dated 25 March 2019 kept one narrow carve-out that lets an AMC upfront up to 1% a year for three years on the first SIP of a first-time mutual fund investor capped at ₹3,000 a month per scheme. The trail is a recurring percentage of the assets under management, paid monthly out of the regular plan's expense ratio, so it is already inside the NAV rather than a separate bill.
It is also the mechanical reason a regular plan costs more than the direct plan of the same scheme. The design is deliberate. By paying the distributor a little every month for as long as the money stays invested, rather than a large sum upfront, the incentive is aligned with keeping the investor in the fund rather than churning them into the next sale. The gap is the price of ongoing advice, weighed against the cost of the unadvised mistakes good guidance is meant to prevent.
₹1,00,000 held in a regular plan carrying a 0.75% trail sends about ₹750 a year to the distributor, drawn from the scheme's expenses and already reflected in the NAV.
Where It Shows Up #
Trail sits inside the expense ratio of every regular plan, which is why the regular and direct versions of one scheme show different NAVs. The gap and what it pays for are covered in the direct vs regular guide.
The Source #
SEBI circular SEBI/HO/IMD/DF2/CIR/P/2018/137, 22 October 2018, mandating the full-trail commission model and banning upfront commission; the first-time investor SIP carve-out (up to 1% a year for three years on a first SIP up to ₹3,000 a month per scheme) sits in SEBI circular SEBI/HO/IMD/DF2/CIR/P/2019/42, 25 March 2019. Issuing authority.
Related on FinSet #
This entry is general education, not personal advice or a recommendation of any scheme. Mutual fund investments are subject to market risks. Read all scheme related documents carefully.