VI. FUND DISTRIBUTION AND CHANNEL MANAGEMENT PRACTICES

Table of Contents

Categories of Mutual Fund Distributors

CategoryDescription
BanksBanks act as distributors of mutual funds by offering various schemes to their customers.
Independent AdvisorsIndependent financial advisors provide personalized advice and guidance on mutual fund investments.
Financial InstitutionsFinancial institutions like insurance companies and brokerage firms also distribute mutual funds.
Online PlatformsOnline platforms and robo-advisors offer digital solutions for investing in mutual funds.

Notes:

  • Mutual fund distributors play a crucial role in helping investors build and manage their investment portfolios.
  • They assist investors in assessing their needs, goals, and resources to determine the most suitable asset allocation plan.
  • Mutual fund distributors analyze the investor’s situation and recommend appropriate mutual fund schemes.
  • Fund managers, on the other hand, analyze market factors and construct portfolios aligned with the mutual fund scheme’s objectives.
  • Different categories of mutual fund distributors include banks, independent advisors, financial institutions, and online platforms.
  • Banks offer mutual fund schemes to their customers as part of their financial services.
  • Independent advisors provide personalized advice and guidance on mutual fund investments.
  • Financial institutions like insurance companies and brokerage firms also distribute mutual funds.
  • Online platforms and robo-advisors provide digital solutions for investing in mutual funds.
  • Each category of mutual fund distributor offers unique advantages and services to investors.
  • Investors can choose a distributor based on their preferences, convenience, and the level of personalized guidance required.

Categories of Mutual Fund Distributors

CategoryCharacteristics
Individual Players– Long history of distribution through individuals
– Operate as single-handed individuals or small-scale businesses
– Mainly involved in paperwork and distribution of financial products
Non-Individual Entities– Partnerships, regional distributors, national distributors, NBFCs, banks, stockbrokers, etc.
– Include distribution companies and banks as institutional distributors
– Serviced by individuals (employees or sub-agents)
– Difference in operations and cost structure
Banks– Prominent channel for mutual fund distribution
– MNC, private sector, public-sector, and cooperative banks involved
– Cater to different client segments (retail banking, wealth management, private banking)
– PSU banks with wide reach in non-urban centers play a significant role
Stockbrokers and NBFCs– Classification between retail clients and wealthy clients
– Some reach clients through employees, while others use sub-agents
– National or regional presence
E-commerce platforms– Online distributors without physical offices
– Operate through the internet for distribution of mutual fund schemes

Notes:

  • Mutual funds in India are distributed through various channels, including individual players, banks, non-individual entities, and e-commerce platforms.
  • Individual players have a long history of distributing financial products and often operate as individuals or small-scale businesses.
  • Non-individual entities include partnerships, regional distributors, national distributors, NBFCs, banks, and stockbrokers.
  • Banks have emerged as a prominent channel for mutual fund distribution, catering to different client segments and employing various business units.
  • Stockbrokers and NBFCs also distribute mutual funds, with some reaching clients through their employees and others using sub-agents.
  • E-commerce platforms and online distributors have entered the market, providing digital distribution of mutual fund schemes.
  • Distribution through these channels may involve paperwork, individual servicing, and different cost structures.
  • PSU banks with a wide reach in non-urban areas play a significant role in distributing mutual fund products.
  • Different players have varying national or regional presence in the mutual fund industry.
  • Each category of distributor offers unique advantages and may cater to specific client segments or geographic locations.
  • The availability of electronic platforms has facilitated the distribution process through websites, mobile phones, and stock exchanges.

Modes of Mutual Fund Distribution

ModeCharacteristics
Paper-based Distribution– Traditional mode of distributing financial products
– Involves physical application forms and paperwork
– Preferred by some distributors and investors
Digital Distribution– Shift towards digital mode of transactions
– Conducted through the internet and mobile phones
– E-commerce platforms and online distributors operate entirely through digital channels
Hybrid Mode– Combination of digital and physical transactions
– Some transactions conducted digitally, while others involve physical paperwork
Online Channel Partners– Distributors expand business through the internet
– Investors prefer online transactions
– Some distributors offer transaction support through their own websites
Stock Exchange Platforms– SEBI facilitates buying and selling of mutual fund units through stock exchanges
– Mutual fund transaction engines developed by exchanges
– Retail investors can participate through stock exchange networks
– NSE’s NMF II Platform and BSE’s BSE StAR Mutual Funds Platform
MF Utilities– Transaction aggregating platform connecting investors, RTAs, distributors, banks, AMCs, etc.
– Offers online transaction submission, document submission, paperless transactions, and client login
– Provides a Common Account Number (CAN) for consolidated mutual fund holdings
– Common Transaction Form for multiple scheme transactions
Computer and Mobile Apps– Distributor-created apps for convenient investment
– Transaction facilities available on smartphones, feature phones, and tablets
– Offered by distributors and AMCs
Electronic Platforms by AMCs– Web-based and mobile-based applications created by AMCs
– Transaction facilities through SMS and WhatsApp
– Direct interaction with the mutual fund
New Age Investment Platforms– Technology-based platforms for investing in mutual funds
– Simplicity of investment without excessive paperwork
– Low-cost options and availability of direct plans
– Examples: Groww, Kuvera, Paytm Money, Coin, etc.

Modes of Mutual Fund Distribution

ModeCharacteristics
Paper-based Distribution– Traditional mode of distributing financial products
– Involves physical application forms and paperwork
– Preferred by some distributors and investors
Digital Distribution– Shift towards digital mode of transactions
– Conducted through the internet and mobile phones
– E-commerce platforms and online distributors operate entirely through digital channels
Hybrid Mode– Combination of digital and physical transactions
– Some transactions conducted digitally, while others involve physical paperwork
Online Channel Partners– Distributors expand business through the internet
– Investors prefer online transactions
– Some distributors offer transaction support through their own websites
Stock Exchange Platforms– SEBI facilitates buying and selling of mutual fund units through stock exchanges
– Mutual fund transaction engines developed by exchanges
– Retail investors can participate through stock exchange networks
– NSE’s NMF II Platform and BSE’s BSE StAR Mutual Funds Platform
MF Utilities– Transaction aggregating platform connecting investors, RTAs, distributors, banks, AMCs, etc.
– Offers online transaction submission, document submission, paperless transactions, and client login
– Provides a Common Account Number (CAN) for consolidated mutual fund holdings
– Common Transaction Form for multiple scheme transactions
Computer and Mobile Apps– Distributor-created apps for convenient investment
– Transaction facilities available on smartphones, feature phones, and tablets
– Offered by distributors and AMCs
Electronic Platforms by AMCs– Web-based and mobile-based applications created by AMCs
– Transaction facilities through SMS and WhatsApp
– Direct interaction with the mutual fund
New Age Investment Platforms– Technology-based platforms for investing in mutual funds
– Simplicity of investment without excessive paperwork
– Low-cost options and availability of direct plans
– Examples: Groww, Kuvera, Paytm Money, Coin, etc.

Pre-requisites to Become a Mutual Fund Distributor

Pre-requisiteDescription
Obtaining NISM Certification– Mandatory certification from the National Institute of Securities Markets (NISM)
– NISM Series-V-A: Mutual Fund Distributors Certification Examination
– Exceptions for individuals aged 50 years or with at least 10 years of experience in the sale and/or distribution of mutual fund products as of May 31, 2010, who can qualify through Continuing Professional Education (CPE) or by passing the NISM certification examination
Know Your Distributor Requirements– KYD process introduced by AMFI to verify information in registration documents and validate ARN holders
– Document verification and bio-metric process
– Submission of self-attested PAN card copy and proof of address
– Bio-metric process for fingerprint impression
Obtaining AMFI Registration Number– Registration with AMFI
– Allotment of AMFI Registration Number (ARN)
– Exempted category individuals (aged 50 years or with 10 years of experience as of May 31, 2010) can obtain ARN without passing the certifying examination through prescribed CPE programs
Empanelment with AMCs– Empanelment with the Asset Management Companies (AMCs)
– Agent of an already empaneled distributor can also sell mutual fund schemes
– Compulsory for selling mutual fund schemes and earning commissions
Employee Registration with AMFI– Institutions into mutual fund distribution need to register with AMFI
– Employees must clear NISM Series V-A: Mutual Fund Distributors Certification Examination
– Obtain Employee Unique Identification Number (EUIN) from AMFI
– EUIN must be quoted in the application form for client investments
Empanelment Procedure with AMC– Fill in a Request for Empanelment Form
– Provide personal information, contact details, PAN, ARN, business details, bank details, preferences, nominee information, and sign a declaration
– Declaration includes commitment to confidentiality, compliance with instructions and guidelines, use of approved advertisement material, provision of information, non-rebate of commissions, and termination of empanelment by the AMC
– AMC may have specific requirements and formats for empanelment

Notes:

  • Becoming a mutual fund distributor requires obtaining NISM certification, completing Know Your Distributor (KYD) requirements, and obtaining an AMFI Registration Number (ARN).
  • NISM Series-V-A: Mutual Fund Distributors Certification Examination is mandatory for distributors, with exceptions for individuals meeting specific age or experience criteria.
  • KYD process involves document verification, a bio-metric process, and submission of PAN card and address proof.
  • Empanelment with AMCs is essential for selling mutual fund schemes and earning commissions.
  • Employees of institutions involved in mutual fund distribution must register with AMFI, clear the NISM certification examination, and obtain an Employee Unique Identification Number (EUIN).
  • Empanelment procedures with AMCs include filling out an application form, providing personal and business details, preferences, nominee information, and signing a declaration of compliance.
  • AMCs may have specific requirements and formats for empanelment, and commission levels may be linked to the volumes generated by distributors.
  • The application forms and formats for empanelment may vary among different AMCs

Revenue for a Mutual Fund Distributor

Revenue ModelDescription
Transaction-Linked Commission– Commission income earned based on individual transactions made by investors
– Paid at the time of a transaction
– Typically a one-time payment
AUM-Linked Commission– Commission income earned based on the assets under management (AUM)
– Paid on an ongoing basis as long as the investor remains invested
– Paid periodically (quarterly or monthly)
Upfronting of Trail Commission– SEBI allows upfront payment of trail commission in certain cases
– Generally applicable for SIP inflows up to Rs. 3,000 per month for new investors
– Upfront payment is based on expected future trail commission for a specified period
– Upfronting is subject to certain conditions and review by SEBI
Trail Commission– Commission calculated as a percentage of the net assets attributable to the units sold by the distributor
– Paid on a quarterly or monthly basis
– Dependent on the net asset value (NAV) of the scheme
Additional Commission for– Higher commission paid to distributors for mobilizing funds from investors
Smaller Town Promotion– Applicable in B-30 locations (cities and towns beyond the top 30 locations)
Transaction Charges– Transaction charge per subscription of Rs. 10,000 and above
– Paid to distributors for mutual fund products
– No transaction charges for direct investments
– Different charges for first-time investors and other investors
GST on Distributors Commission– Goods and Services Tax (GST) applicable to commission income
– Distributor required to raise an invoice and pay GST to the government
– Reverse charge mechanism may apply for procurements from unregistered suppliers

Notes:

  • Mutual fund distributors earn revenue through commission income, which can be transaction-linked or AUM-linked.
  • Upfronting of trail commission is allowed in certain cases, subject to specific conditions and review by SEBI.
  • Trail commission is calculated based on the net assets of units sold by the distributor and paid periodically.
  • Additional commission may be provided for promoting mutual funds in smaller towns (B-30 locations).
  • Transaction charges are applicable for subscriptions of Rs. 10,000 and above, with different rates for first-time investors and others.
  • GST is applicable to the commission earned by distributors, and they are required to raise an invoice and pay the GST to the government.
  • The reverse charge mechanism may apply for procurements from unregistered suppliers.

Commission Disclosure Mandated by SEBI

Disclosure RequirementDescription
Total Commission and Expenses Paid to Distributors– Mandated for Mutual Funds/AMCs
– Disclosed on respective websites
– Applicable to distributors satisfying certain conditions:
– Multiple points of presence (More than 20 locations)
– AUM raised over Rs. 100 crores across the industry in the non-institutional category, including HNIs
– Commission received of over Rs. 1 crore p.a. across the industry
– Commission received of over Rs. 50 lakhs from a single Mutual Fund/AMC
– Data submitted to AMFI for consolidated disclosure
Distributor-wise Inflows– Additional disclosure by Mutual Funds/AMCs
– Indicates whether the distributor is an associate or group company of the sponsor(s) of the mutual fund
– Disclosed on respective websites
Net Inflows– Additional disclosure by Mutual Funds/AMCs
– Disclosed on respective websites
Average Assets Under Management (AUM)– Additional disclosure by Mutual Funds/AMCs
– Disclosed on respective websites
Ratio of AUM to Gross Inflows– Additional disclosure by Mutual Funds/AMCs
– Disclosed on respective websites
Excessive Portfolio Turnover Ratio and Due Diligence of Distributors– Conducted by AMCs
– Triggered if a distributor has a portfolio turnover ratio more than two times the industry average
– Additional due diligence is required
– Data submitted to AMFI for consolidated disclosure
Consolidated Data Disclosure by AMFI– AMFI discloses consolidated data regarding commission and expenses paid to distributors
– Consolidated data is disclosed on the AMFI website

Notes:

  • SEBI mandates Mutual Funds/AMCs to disclose the total commission and expenses paid to distributors on their websites.
  • Specific conditions are set for distributors who require commission disclosure, such as having multiple points of presence, raising AUM over Rs. 100 crores, or receiving a certain amount of commission from a single Mutual Fund/AMC.
  • Mutual Funds/AMCs are also required to disclose distributor-wise gross inflows, net inflows, average AUM, and the ratio of AUM to gross inflows on their websites annually.
  • Excessive portfolio turnover ratio by a distributor triggers additional due diligence by AMCs.
  • AMCs submit the data to AMFI, which then discloses the consolidated data on its website.

Due Diligence Process by AMCs for Distributors of Mutual Funds

Due Diligence ProcessDescription
Criteria for Due Diligence– Distributors qualifying any of the following criteria:
– Multiple points of presence (More than 20 locations)
– AUM raised over Rs. 100 crores across the industry in the non-institutional category, including HNIs
– Commission received of over Rs. 1 crore p.a. across the industry
– Commission received of over Rs. 50 lakhs from a single Mutual Fund
Factors Considered in Due Diligence– Business model, experience, and proficiency in the business
– Record of regulatory/statutory levies, fines and penalties, legal suits, customer compensations made
– Causes for the above and resultant corrective actions taken
– Review of associates and subsidiaries based on the above factors
Organizational Controls– Ensuring delinkage of the following processes from sales and relationship management processes and personnel:
– Customer risk/investment objective evaluation
– Mutual Fund scheme evaluation and appropriateness to various customer risk categories

Notes:

  • SEBI mandates AMCs to conduct a due diligence process for distributors who meet specific criteria, such as having multiple points of presence, raising AUM over Rs. 100 crores, or receiving a certain amount of commission.
  • The due diligence process includes evaluating the distributor’s business model, experience, and proficiency in the business.
  • AMCs also review the distributor’s record of regulatory/statutory levies, fines and penalties, legal suits, and customer compensations, as well as the actions taken to address these issues.
  • Associates and subsidiaries of the distributor are also subject to review based on the above factors.
  • Organizational controls are implemented to ensure that customer risk assessment and evaluation of Mutual Fund schemes are independent from sales and relationship management processes and personnel.

Difference between Distributors and Investment Advisors

DistributorsInvestment Advisors
Engaged in the business ofEngaged in the business of
distributing mutual fund productsproviding investment advice
Cannot hold themselves out asHold themselves out as investment
investment advisorsadvisors
Can offer advice while distributingProvide investment advice subject
the product (advisory)to appropriateness
Need to ensure product suitabilityNeed to ensure product suitability
for the customerfor the customer
Can earn both advisory and distributionCannot earn both advisory and
commissiondistribution commission
Need to disclose conflict of interest
when selling group/associate products
Compliance and risk managementCompliance and risk management
processes include due diligenceprocesses include due diligence
on defined management processeson defined management processes
Cannot project themselves asCannot project themselves as
investment advisors or financialinvestment advisors or financial
plannersplanners

Notes:

  • Distributors are primarily engaged in the business of distributing mutual fund products, while investment advisors provide investment advice.
  • Distributors cannot hold themselves out as investment advisors, and their advice is incidental to their primary activity of distribution.
  • Distributors can offer advice (advisory) while distributing the product, subject to appropriateness.
  • Both distributors and investment advisors need to ensure the suitability of the product for the customer.
  • Distributors cannot earn both advisory and distribution commission, whereas investment advisors solely earn from providing investment advice.
  • Distributors must disclose any conflict of interest when selling group/associate products.
  • Compliance and risk management processes for distributors include due diligence on defined management processes.
  • Distributors cannot present themselves as investment advisors or financial planners.

Nomination Facilities to Agents/Distributors and Payment of Commission to Nominee

Key PointsDescription
Nomination FacilityAMCs offer nomination facility to mutual fund distributors at the time of empanelment to enable the nominee to receive commission in case of the distributor’s death. Distributors are encouraged to provide nominations to reduce hurdles faced by legal heirs in obtaining legal heir/succession certificates.
Payment of Commission to Nominee/Legal HeirCommissions are paid to the nominee or legal heir (if no nominee is registered) of the deceased distributor. Legal heirs may be required to produce necessary documents evidencing legal heirship/succession if no nomination is registered. Commissions are payable until the ARN code of the deceased distributor is not changed by the investor. New business and systematic transactions are not permitted under the ARN code of the deceased distributor.
Nominations and DocumentationNominees must be registered, and payment of commission can be made to them without the requirement of legal heir/succession certificates, upon submission of necessary documents such as the death certificate. A nominee/legal heir need not be an ARN holder to claim and receive the commission.
Transfer of AssetsNominees or legal heirs are not allowed to transfer the assets to their account unless a specific request is received from the investor. In case of a specific request, the assets can be transferred if the nominee or legal heir is a valid ARN holder.
Intimation of DemiseThe nominee/legal heir is required to inform AMFI about the demise of the ARN holder along with an attested true copy of the death certificate. AMFI will then inform all AMCs about the distributor’s demise. This process is not applicable for overseas distributors.
Eligibility for Transfer of AUM of the Deceased DistributorTo be eligible for the transfer of the deceased distributor’s assets under management (AUM): – The ARN of the deceased distributor should have been valid at the time of demise and not suspended. – The nominee/legal heir should have a valid ARN and be KYD compliant. – Only assets procured by the deceased distributor prior to their demise and during the validity of their ARN can be transferred.

Change of Distributor

Key PointsDescription
Change of Distributor Code in FolioInvestors have the right to change their distributor or go direct. Written requests by investors for changing the distributor should be complied with by AMCs, without insisting on a ‘No Objection Certificate’ from the existing distributor. In such cases, no commission is payable to either the old or new distributor. This provision ensures investor choice while discouraging distributors from inducing or forcing investors to request a change of distributor code.
Initiating Change of Distributor CodeA distributor can initiate a change in the distributor code in folios under the following circumstances: – Change in name/legal status of the distributor – Merger/acquisition/consolidation/transfer of business within the same group for non-individual distributors – Transfer of AUM consolidation within the same family/close relatives for individual distributors – Transfer of business by individual distributors
Transfer of AUMThe transfer of assets under management (AUM) can only happen if the entire AUM is being transferred from the existing distributor. The transfer should be made in the name of a valid ARN holder who is KYD compliant. Once the AUM transfer is complete, the old ARN should be surrendered, and no further business can be conducted under that ARN. AMFI has defined a detailed procedure for effecting such a change of distributor.
Other Conditions– The change of distributor code is not allowed under any other circumstances. – The change of distributor code should comply with the guidelines provided by AMFI.