Since SEBI announced the waiver of entry loads on mutual fund products, the fund industry has been concerned over AMFI certified agents not selling the MF schemes as the investments offer lower commission than unit-linked insurance plans (ULIPs) of insurance companies.

But does an agent really earn better commission from ULIPs than mutual funds? If agents think so, they could be in for a surprise.

While commission from insurance products are constant and are purely based on the premium paid by policyholders, the trail fee earned on a mutual fund is based on the net assets and, thus market movements. Commission

Let's consider an AMFI agent who sells a mutual fund to an investor. The investor is planning to save Rs 1 lakh every year for 10 years towards his daughter's marriage. How much will he make?

Most mutual funds currently pay an upfront commission of 0.5 per cent on the investment brought in by the agent and also a trail fee of 0.5 per cent a year (calculated in monthly, quarterly or half-yearly modes) for the assets under management brought in by him. Insurance companies pay 7.5-10 per cent as first year commission for a ULIP and the subsequent commissions decrease to 3-4 per cent in the second year. From the third year the commission is at one per cent till end of the premium paying term.

However, this commission is paid on the premium payable and not on the assets under management.

Let us assume now that the investor intends to invest for 10 years in a MF scheme and a ULIP for the same amount. Calculations show that, assuming assets grow by 10 per cent a year, at the end of the 10-year period, the agent would have earned Rs 42,000 from the mutual fund scheme..

In the case of the ULIP, the investor could have earned Rs 22,000 (assuming he earns 10 per cent of the premium as commission in the first year).

The conclusion is that the agent will be better off selling a mutual fund scheme rather than a ULIP.

However, in reality, the problem is that the retail investors hold MF schemes for much shorter periods. According to the Association of Mutual Funds in India's September 2009 data, 50 per cent of retail investors hold them for a period of less than two years.

But the situation is likely to change as MFs are not launching new fund offers aggressively and the agent will not be in a position to churn the portfolio just for want of commission.

Currently a small percentage of retail investors stay invested in MF beyond five years. But the MF business can be procured faster than insurance.