First of all thanks a lot for all the replays. I am not using line trace, but simply shooting an actor which is the bullet and looking for collisions. I will show you some photos:
This is the event graph for the bullets (sorry it is a little messy right now).
These are the mats for the actor being hit:
Here is where i put the phys mat in the material:
And here is the phys mat defined in project settings:
I also tried what you suggested earlier with the collision, and like I said the bullet definitely collides with the mesh itself, not just the capsule.
Any further help will be greatly appreciated!