Under SEBI regulations, how are mutual fund distributors compensated by AMCs for mobilizing investments under Regular Plans?

[ A ]Strictly under a full trail commission model calculated on daily net assets (AUM * Trail Rate / 365) and paid periodically, without any upfront commission.[ CORRECT ]

[ B ]Via a mandatory 5% upfront cash commission deducted directly from the investor's initial capital contribution.

[ C ]Through annual gift hampers and foreign luxury vacation sponsorships funded by the scheme's assets.

[ D ]By paying flat fixed monthly salaries directly from the Consolidated Fund of India.

Takeaway

Option A is correct: Strictly under a full trail commission model calculated on daily net assets (AUM * Trail Rate / 365) and paid periodically, without any upfront commission.

Derivation

SEBI's Master Circular mandates a strict 'full trail model' of commission for all mutual fund schemes. AMCs are prohibited from paying any upfront commission or upfronting trail commission (except for SIPs under specific regulatory limits), directly or indirectly in cash or kind (e.g., sponsorships). Trail commission is calculated daily as: Daily Trail = (Daily AUM * Annual Trail Rate) / 365, and paid out monthly or quarterly. This aligns distributor interests with long-term investor holding. This tests commission rules. A common error is believing upfront brokerages are still legal.

Why the others fail

B — Via a mandatory 5% upfront cash commission deducted directly from the investor's initial capital contribution.

Upfront commissions deducted from investor contributions were completely abolished by SEBI to eliminate mis-selling incentives.

C — Through annual gift hampers and foreign luxury vacation sponsorships funded by the scheme's assets.

Non-monetary incentives, gifts, and sponsorships to distributors are strictly prohibited by SEBI regulations.

D — By paying flat fixed monthly salaries directly from the Consolidated Fund of India.

Distributors are independent business intermediaries compensated via scheme trail fees, not salaried government employees.