Fund Distribution and Channel Management Practices

Fund Distribution and Channel Management Practices (Part 1)

Definition: Fund distribution and channel management practices refer to the processes by which mutual funds are distributed to investors through various channels.
Details: This includes the role of mutual fund distributors, different kinds of distributors, modes of distribution, and the regulations governing these practices.

Key Concepts

Role and Importance of Mutual Fund Distributors: Mutual fund distributors play a crucial role in helping investors achieve their financial goals by assessing their needs, limitations, resources, and financial goals, and providing them with suitable investment options.
Different Kinds of Mutual Fund Distributors: There are various types of mutual fund distributors, including:
- Individual Players: Individual agents who operate on their own, often with a small staff.
- Non-Individual Entities: Partnerships, regional distributors, national distributors, NBFCs, banks, stockbrokers, and other institutions that distribute mutual funds.
- Banks: Banks have emerged as a prominent channel for mutual fund distribution, with many offering wealth management services to their clients.
- Stock Brokers: Stock brokers also distribute mutual funds, often through their own employees or sub-agents.
- National Distributors: Firms that distribute mutual funds on a national level, often through their own branches or sub-agents.
- Regional Distributors: Firms that distribute mutual funds within a specific region.
- E-commerce Platforms: Online platforms that distribute mutual funds, often through digital channels.

Modes of Distribution

Traditional Method: Mutual funds were traditionally distributed through paper-based application forms.
Digital Mode: With the advent of the internet and mobile phones, mutual fund distribution has shifted towards digital transactions.
Hybrid Mode: Some distributors employ a hybrid mode, where some transactions take place digitally, while others happen physically.
Online Channel Partners: Distributors who offer transaction support through their own websites.
Stock Exchange Platforms: Stock exchanges have developed mutual fund transaction engines, allowing investors to buy and sell mutual fund units through the exchange.
Execution Only Platforms (EOPs): Digital platforms that allow investors to purchase and redeem mutual fund units directly from the mutual fund/asset management company.

Regulations

SEBI Guidelines: SEBI has provided guidelines for Execution Only Platforms (EOPs) and has allowed investors to directly access the infrastructure of stock exchanges to purchase and redeem mutual fund units.
AMFI Registration: Distributors must register with AMFI to offer mutual fund transactions through stock exchange platforms.
Stock Exchange Redressal Mechanism: Stock exchanges have a redressal mechanism in place to address investor complaints related to mutual fund transactions.

Fund Distribution and Channel Management Practices (Part 2)

Introduction to MF Utilities: MF Utilities (MFU) is a transaction aggregating platform that connects investors, RTAs, distributors, banks, AMCs, and others, providing a single point for time-stamping of transactions, document submission, paperless transaction facility, and login facility for clients.
Key Features of MFU:
- Investors are allotted a Common Account Number (CAN) under which all their mutual fund holdings are consolidated.
- Investors must be KYC compliant to register for a CAN.
- MFU offers a Common Transaction Form to transact in multiple schemes across participating mutual funds using a single form.
- Multiple modes of payments are available for investment through physical and electronic means.
Computer-based and Mobile-based Apps: Distributors offer transaction facilities on mobile devices, making it convenient for clients to transact.
Electronic Platforms created by AMCs: Various AMCs have created their own web-based and mobile-based applications for transactions.
New Age Investment Platforms: Technology-based platforms allow investors to invest in mutual funds with simplicity and low cost, offering direct plans and minimal paperwork.

Pre-requisites to become a Distributor of a Mutual Fund

NISM Certification: SEBI mandates mutual fund distributors to have a valid certification from NISM by passing the NISM Series-V-A: Mutual Fund Distributors Certification Examination.
Know Your Distributor (KYD) Requirements: AMFI has introduced the KYD process to verify the correctness of information provided in registration documents and to have verification of ARN holders.
Obtaining AMFI Registration Number (ARN): After obtaining certification and completing KYD requirements, distributors register with AMFI to obtain an ARN.
Empanelment with AMCs: Distributors must get empaneled with AMCs to sell mutual fund schemes and earn commissions.

Procedure for Getting Empaneled as a Mutual Fund Distributor with AMC

Request for Empanelment Form: Distributors fill in a form providing basic details, such as personal information, business details, and bank details.
Declaration: The applicant signs a declaration committing to keep transactional information confidential, abide by instructions, and ensure that all employees engaged in selling or marketing mutual funds have an EUIN.
Empanelment Process: Each AMC has its own format for collecting details and empaneling distributors, with some directly empaneling only distributors who can generate adequate business.

Fund Distribution and Channel Management Practices (Part 3)

Definition: Fund distribution and channel management practices refer to the processes and procedures used by mutual fund companies to distribute their products through various channels, including distributors, agents, and online platforms.
Details: The mutual fund distributor earns revenue in the form of commission income for the distribution of mutual fund products/schemes, as specified by SEBI from time to time.

Key Concepts

Trail Commission:
- Definition: Trail commission is a type of commission paid to mutual fund distributors for as long as the investor's money is held in the fund.
- Details: Trail commission is calculated as a percentage of the net assets attributable to the units sold by the distributor, and is normally paid by the AMC on a quarterly or monthly basis.
Additional Commission:
- Definition: Additional commission is paid to mutual fund distributors for promoting mutual funds, especially in B-30 locations (cities and towns beyond the top 30 locations).
- Details: The additional commission is used to promote mutual funds and can be used for distribution-related expenses, including distributor commission.
Transaction Charges:
- Definition: Transaction charges are fees paid by investors for subscriptions worth more than Rs. 10,000 to mutual fund distributors.
- Details: As per SEBI's circular issued in August 2025, the transaction charges framework has been withdrawn, and distributors will be compensated directly by AMCs.
GST on Distributors' Commission:
- Definition: GST is payable by mutual fund distributors on their commission income, and the AMC is liable to pay GST under reverse charge on commission paid to unregistered distributors.
- Details: The distributor is required to raise an invoice for the commission and pay the GST to the government.
Commission Disclosure:
- Definition: SEBI has mandated mutual funds/AMCs to disclose on their respective websites the total commission and expenses paid to distributors who satisfy certain conditions.
- Details: The disclosure includes the total commission and expenses paid to distributors, as well as distributor-wise gross inflows, and is submitted to AMFI for consolidation and disclosure on its website.

Fund Distribution and Channel Management Practices (Part 4)

Definition: Fund distribution and channel management practices refer to the processes and guidelines that govern the distribution of mutual funds through various channels, including distributors, agents, and online platforms.
Details: The Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI) have established guidelines and regulations to ensure that mutual fund distributors operate in a fair and transparent manner.

Key Concepts

Distributor Due Diligence: Mutual funds/AMCs are required to conduct due diligence on distributors who meet certain criteria, such as having multiple point presence, high AUM, or high commission income.
Fit and Proper Criteria: Distributors must meet certain fit and proper criteria, including business model, experience, and proficiency, as well as organizational controls to ensure that sales and relationship management processes are delinked from customer risk/investment objective evaluation.
Difference between Distributors and Investment Advisors: Distributors cannot call themselves investment advisors, and investment advisors cannot earn both advisory and distribution commission.
Advisory and Execution Only Transactions: Distributors must ensure that products are suitable for clients, and transactions can be categorized as either advisory or execution only.

Regulatory Guidelines

SEBI Circulars: SEBI has issued circulars, such as SEBI/HO/IMD/PoD1/CIR/P/2025/115 and SEBI/CIR/IMD/DF/13/2011, to regulate mutual fund distributors and ensure compliance with guidelines.
AMFI Guidance: AMFI provides guidance to mutual fund distributors on various aspects, including nomination facilities and payment of commission to nominees.

Nomination Facilities

Nomination Facility: AMFI has advised its members to offer nomination facilities to mutual fund distributors to enable nominees to receive commission in the event of the distributor's death.
Commission Payment: Commissions can be paid to nominees or legal heirs of deceased distributors, subject to certain conditions and requirements.

Important Points

Trail Commission: Distributors are eligible only for trail commission, and upfront commission or transaction charges have been discontinued.
Nominee/Legal Heir: A nominee or legal heir need not be an ARN holder to claim and receive commission, and commission can be paid to the nominee until AUM under the ARN of the deceased ARN holder becomes nil.

Fund Distribution and Channel Management Practices (Part 5)

Definition of Transfer of Assets: When an ARN holder passes away, the assets can be transferred to the nominee or legal heir, provided they are a valid ARN holder.
Intimation to AMFI: The nominee or legal heir must inform AMFI about the demise of the ARN holder, along with a death certificate attested by a Gazette Officer.
Eligibility for Transfer of AUM: To be eligible for the transfer of AUM, the ARN of the deceased distributor must have been valid at the time of demise, and the nominee or legal heir must have a valid ARN and be KYD compliant.

Change of Distributor

Reason for Change: An investor can change their distributor without specifying a reason, and the industry allows this to ensure the investor receives regular updates and services.
No Commission Payable: In case of a change of distributor code, no commission is payable to either the old or new distributor to prevent any wrongdoing.
Written Request: Investors can change their distributor or go direct through a written request, and AMCs must comply without requiring a 'No Objection Certificate' from the existing distributor.

Transfer of AUM

Conditions for Transfer: The transfer of AUM can only happen if the entire AUM is transferred from the existing distributor to a valid ARN holder who is KYD compliant.
Surrender of Old ARN: The old ARN must be surrendered, and no further business can be done under that ARN once the AUM transfer is complete.
Prescribed Procedure: AMFI has prescribed a detailed procedure for effecting such a change, which must be followed.

Sample Questions

Individual Distributors: Only individuals are not allowed to distribute mutual funds in India; other entities like companies can also distribute mutual funds. (Answer: b. False)
Mutual Fund Distributors Certification: The certification examination is offered by the National Institute of Securities Markets (NISM), although the question does not provide this option. (Answer: Not available in the options provided)
Commission on Direct Plans: Mutual fund distributors earn no commission when the investor chooses to invest in “direct” plans. (Answer: a. True)