The maths of a practice: trail commission, sub-distribution shares, and what a ₹1 crore SIP book earns

Distribution is a trail business. You are not paid for the sale; you are paid, slowly, for keeping the client invested. Understanding how that trail is calculated, and what share of it reaches you, is the difference between a hobby and a practice. This chapter does the sums on a ₹1 crore book.

Where trail comes from

Every mutual fund scheme charges a total expense ratio, TER, deducted daily from the scheme's assets before NAV is published. SEBI caps the TER by AUM slab, so larger schemes charge less. In a Regular Plan, part of that TER is paid by the AMC to the distributor as trail commission. In a Direct Plan there is no distributor, so the TER is lower by roughly that amount.

Trail is quoted as a percentage per year of the AUM you have sourced, and it is paid monthly, usually a month in arrears. Rates differ by scheme category: equity schemes pay more than debt and liquid schemes, and each AMC publishes its own table. Since 2018 there is no upfront commission; everything is trail.

Sub-distribution shares

When you source a client under a larger ARN holder, the AMC pays trail to that ARN holder. The ARN holder then passes an agreed share of that trail to you; in this example we assume 90%. Sub-distribution shares vary widely across the market and are always subject to the agreement and SEBI/AMFI regulations.

The 10% retained covers the platform, the exchange connectivity, KYC, mandates, statements and the compliance layer you would otherwise build yourself. Whether that is a good trade depends on how much of your time those things would eat. For most individual MFDs, the answer is a great deal.

What ₹1 crore earns

A "₹1 crore SIP book" here means ₹1 crore of assets under management, built mostly through SIPs. We assume an average trail of 0.75% a year across the book. That is an illustration; your actual blended rate depends on the mix of equity and debt schemes and the AMC tables in force.

Two observations. First, ₹5,625 a month on a ₹1 crore book is not a living. The economics of distribution start to work somewhere between ₹5 crore and ₹10 crore, which is why the first two years feel slow. Second, trail compounds in your favour: as the client's AUM grows with the market and with every SIP instalment, your trail grows without a single new sale.

How a SIP book turns into AUM

Suppose you sign 200 clients at an average SIP of ₹5,000 a month. That is a monthly SIP book of ₹10 lakh, or ₹1.2 crore a year flowing in. Ignoring market movement, you cross ₹1 crore of AUM in about ten months. At an assumed 10% a year, you cross ₹5 crore in roughly four years with no new clients, and sooner if clients step up. We take up step-ups in chapter six.

Tax on your side: commission income is taxed at your slab as business income, and tax is deducted at source on commission as per the income-tax rules in force. Keep your expenses, mobile, travel, software, documented; they are deductible. GST registration depends on your turnover threshold, so check with a chartered accountant once trail crosses a few lakh a year.

The quiet lesson of the maths is retention. A client who stays twenty years is worth far more than three clients who leave after two. Every rule in chapter four, and every habit in chapter six, is really about that.