How Mutual Fund Commissions Eat Away 25% of Investor Wealth Across 80% of Schemes in a Decade

As per 1 Finance Research, distributor commissions in regular mutual fund plans significantly reduced investor returns when compared with direct plans.  

The data highlights that hidden fees affected 80% of equity schemes over a 10-year period, reducing investor wealth by 25% or more in regular plans. 

Commission Costs Erode Wealth Over Time 

The study conducted on equity mutual fund schemes with data as of March 2024 found that over a 10-year holding period, more than 80% of regular-plan investors received at least 25% lower returns than those who opted for direct plans.  

The gap extended to over 50% in nearly 1 in 5 schemes, driven by compounding the higher expense ratio included in TER of regular plans. These commissions are not easily visible yet consistently affect outcomes. 

5-Year Analysis Reflects Ongoing Trend 

In the mid-term analysis over five years, 53% of regular schemes showed a wealth erosion of 15% or more compared to direct counterparts.  

The wealth gap was attributed specifically to structural expense differences rather than scheme selection. Both plans follow the same portfolio, but regular plans include additional distributor payouts. 

Asset Distribution Suggests Commission Model Persistence 

Despite the performance gap, regular plans still hold the majority of assets. As of March 2024, 21.2% of regular investments were held for over 5 years, compared to just 7.7% in direct plans. 

This suggests that distributor-led distribution channels continue to dominate despite the cost disadvantage over longer holding periods. 

Read More: How Long Does It Take for a Lump Sum of ₹9.5 Lakh to Grow to ₹30 Lakh?! 

Compounding Magnifies Cost Difference 

According to the analysis, the drag from embedded commissions compounds over time. While short-term gaps may appear mild, they widen dramatically over extended durations due to lower compounding in regular plans.  

The simulation used a uniform ₹100 investment across both plan types to accurately isolate the impact of cost differences. 

Conclusion 

The findings underline that hidden distributor commissions within regular mutual fund plans resulted in significant long-term wealth erosion. Over time, these embedded costs have caused sustained underperformance compared to direct plans, as shown in over 80% of the schemes analysed. 

Disclaimer: This blog has been written exclusively for educational purposes. The securities or companies mentioned are only examples and not recommendations. This does not constitute a personal recommendation or investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.