AIF distributor commission — how distributors are paid, and what changed on 1 May 2023
How are AIF distributors paid in India?
Since 1 May 2023, Category III AIFs must pay distributors on an all-trail basis with no upfront commission, paid out of the management fee. Categories I and II may pay up to one-third of the total distribution fee upfront, with the remainder on equal trail across the fund's tenure. Commission must be disclosed to the client at onboarding.
What changed
On 1 May 2023 SEBI restructured how Alternative Investment Funds may pay the people who distribute them, and made direct plans mandatory at the same time.
Two changes, and they are not the same change.
The commission rules
| Category I and II | Category III | |
|---|---|---|
| Upfront commission | Up to one-third of total distribution fee | None permitted |
| Remainder | Equal trail across the fund's tenure | All-trail |
| Paid from | Fund, per its terms | The management fee |
| Disclosure to client | At onboarding | At onboarding |
The Category III rule is the sharper one. Not only is upfront payment barred, the commission comes out of the manager's management fee rather than being an additional charge borne by the fund. That puts the manager and the distributor on the same side of a single fee pool.
For Category I and Category II — which between them are the large majority of the industry — a third may still be paid upfront, and the rest must be spread evenly across the fund's life rather than front-loaded in the early years.
Why "equal trail across the tenure" matters
Category I and II AIFs are close-ended, often with tenures of seven years or more. Spreading two-thirds of the distribution fee evenly across that period does two things.
It ties the distributor's income to the fund surviving and the investor staying, rather than to the moment of sale. And it converts what was a lumpy, transaction-shaped business into an annuity — smaller at the point of sale, larger and more predictable over a book that compounds.
That second effect is the one worth planning around. A distributor building a book under these rules is building recurring revenue, and the economics reward retention over origination.
Direct plans
A direct plan lets an investor subscribe without a distributor and without bearing distribution commission.
Its real function is disclosure. Once a direct plan exists alongside a regular one, the cost of intermediation is a visible number rather than something embedded in a single fee. An investor can see what advice costs and decide whether it is worth paying for — which is a stronger position for a distributor who is genuinely adding value, and a weaker one for a distributor who is not.
What a distributor should have in writing
- Which category the fund is, since it determines whether any upfront payment is possible at all. The directory records the category for every registered fund.
- The total distribution fee, and the split between upfront and trail.
- The trail schedule, and confirmation that it is equal across the tenure rather than weighted.
- For Category III, confirmation the commission comes from the management fee and is not an additional charge to the fund.
- The onboarding disclosure, in the form the client will actually receive.
What this does not change
It does not create any obligation to publish fund performance. Distributor economics are now regulated in detail; fund returns remain outside any public disclosure regime.
A distributor is therefore selling into an information gap that the commission rules did nothing to close — which is precisely why what you can verify about a manager matters more than what you are told about their track record.
This page reports the rules. It is not legal advice, and the circular itself governs.
Checked against source on 24 August 2026. This page is information, not legal, tax or investment advice.