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 and methods used by mutual fund distributors to sell and manage mutual fund products to investors.
Importance: 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.

Key Concepts

Role of Mutual Fund Distributors: Mutual fund distributors act as intermediaries between investors and mutual fund companies, helping investors to select suitable mutual fund schemes and providing them with investment advice.
Types of Mutual Fund Distributors: There are two main types of mutual fund distributors:
- Individual Distributors: These are single-person entities that operate independently, often with minimal staff and infrastructure.
- Non-Individual Distributors: These include partnerships, regional distributors, national distributors, NBFCs, banks, and stockbrokers, which operate through various business models, such as branch offices, sub-agents, and online platforms.
Modes of Distribution: Mutual funds can be distributed through various channels, including:
- Physical Mode: Traditional paper-based application forms.
- Digital Mode: Online platforms, websites, and mobile apps.
- Hybrid Mode: Combination of physical and digital modes.
Online Distribution Models: These include:
- Online Channel Partners: Distributors who offer transaction support through their own websites.
- Stock Exchange Platforms: Platforms like NSE's NMF II and BSE's StAR Mutual Funds that enable buying and selling of mutual fund units.
- Aggregating Platforms: Platforms like MF Utilities (MFU) that connect investors, RTAs, distributors, banks, and AMCs, facilitating online transactions and consolidating investor holdings.
- Computer-based and Mobile-based Apps: Apps created by distributors to facilitate investments for their clients.

Fund Distribution and Channel Management Practices (Part 2)

Electronic Platforms: Various Asset Management Companies (AMCs) have created their own electronic platforms, such as web-based and mobile-based applications, to facilitate transactions. These platforms allow investors to deal directly with the mutual fund.
New Age Investment Platforms: Technology-based platforms have emerged, allowing investors to invest in mutual funds with simplicity and low cost. These platforms, such as Groww, Kuvera, and Paytm Money, offer direct plans of mutual funds and are available through websites and apps.

Pre-requisites to Become a Distributor of a Mutual Fund

NISM Certification: SEBI mandates that mutual fund distributors must have a valid certification from the National Institute of Securities Markets (NISM) by passing the NISM Series-V-A: Mutual Fund Distributors Certification Examination.
Eligibility Criteria: To be eligible to sell or market mutual funds, individuals must:
- Obtain NISM Certification
- Complete Know Your Distributor (KYD) requirements
- Obtain an AMFI Registration Number (ARN)
KYD Requirements: The KYD process involves document verification and a bio-metric process to verify the correctness of the information provided in the registration documents.
ARN: After obtaining certification and completing KYD requirements, individuals must register with the Association of Mutual Funds in India (AMFI) to obtain an ARN.

Empanelment with AMCs

Empanelment Process: Empanelment with an AMC is a simple process that involves filling out a Request for Empanelment Form, which provides basic details such as personal information, business details, and bank details.
Declaration: The applicant must sign a declaration committing to keep transactional information confidential, abide by instructions and statutory codes, and not issue unauthorized advertisements.
EUIN: Employees of institutions that are into the distribution of mutual funds need to clear the NISM Series V-A: Mutual Fund Distributors Certification Examination and obtain an Employee Unique Identification Number (EUIN) from AMFI.

Revenue for a Mutual Fund Distributor

Commission Structure: Mutual fund distributors earn revenue in the form of commission income, which is typically paid on a monthly basis as per the commission structure decided by the respective AMCs.
Trail Commission: The 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.
Regulatory Guidelines: SEBI has introduced a revised framework for paying additional commission to mutual fund distributors, aiming to promote investor inclusion and discourage mis-selling.

Fund Distribution and Channel Management Practices (Part 3)

Trail Commission: A commission paid to distributors for the duration of the investment, calculated as a percentage of the investment value. For example, a 1% trail commission rate per annum would be divided by 365 to arrive at the daily trail commission amount.
Calculation of Trail Commission: The trail commission for each day is calculated using the formula: Trail commission for the day = AUM X trail commission rate p.a./365.
Additional Incentives: SEBI has introduced additional incentives for distributors who onboard new individual investors from B-30 cities and women investors, as per circular SEBI/HO/IMD/IMD-PoD-1/P/CIR/2025/23.
Transaction Charges: SEBI has withdrawn the transaction charges framework, removing investor-borne transaction charges and the requirement for investors to pay upfront commissions to distributors.
GST on Distributors' Commission: Distributors registered with GST must raise an invoice for their commission and pay GST, while recipients are liable to pay GST on purchases from unregistered suppliers under the reverse charge mechanism.
Commission Disclosure: SEBI has mandated mutual funds/AMCs to disclose the total commission and expenses paid to distributors on their websites, as well as submit data to AMFI for consolidation and disclosure.
Due Diligence Process: AMCs are required to conduct due diligence on distributors who meet certain criteria, such as multiple point presence, high AUM, or high commission receipts.
Difference between Distributors and Investment Advisors: Distributors are excluded from the definition of investment advisors if they are registered with an association of asset management companies and provide investment advice incidental to their primary activity.
Advisory and Execution-only Services: Distributors may offer advisory services, which are subject to the principle of appropriateness, or execution-only services, which require ensuring that transactions are suitable for the client.

Fund Distribution and Channel Management Practices (Part 4)

Customer Relationship: A written communication must be made to the investor regarding the unsuitability of a product, and the communication must be duly acknowledged and accepted by the investor.
Execution Only Transactions: A customer confirmation must be obtained prior to the execution of an 'execution only' transaction, and the customer is not required to pay the distributor anything other than standard flat transaction charges.
Conflict of Interest: Distributors must make disclosures to customers regarding conflicts of interest arising from selling mutual fund products of the distributor's group or associates.
Compliance and Risk Management: Distributors must have defined management processes for reviewing products, determining customer risk appetite, and investment categorization.

Key Concepts

Due Diligence: Distributors must perform due diligence, including reviewing transactions, exceptions identification, escalation, and resolution processes.
Customer On-boarding: Distributors must have a customer on-boarding and relationship management process, servicing standards, and an enquiry/grievance handling mechanism.
Internal/External Audit: Distributors must have internal/external audit processes and consider comments/observations related to mutual fund distribution business.

Nomination Facilities to Agents/Distributors

Nomination Facility: AMFI has advised its members to offer a nomination facility to AMFI-registered mutual fund distributors to provide protection against loss of income to the distributor's family.
Commission Payment: Commissions are paid to nominees or legal heirs of deceased mutual fund distributors, and the nominee/legal heir need not be an ARN holder to claim and receive the commission.
Conditions for Commission Payment: Commission can be paid to the nominee/legal heir only for assets procured by the deceased distributor during the validity of their ARN, and the ARN of the deceased agent/distributor should be valid on the date of demise.

Change of Distributor

Change of Distributor Code: Investors can change their distributor or go direct through a written request, and AMCs must comply without insisting on a 'No Objection Certificate' from the existing distributor.
Commission Payment: No commission is payable to any distributor in case of a change of distributor code, unless the change is initiated by the investor due to voluntary cessation of business by the distributor.
Conditions for Change of Distributor: A distributor can initiate a change in the distributor code in the folios of clients only in specific circumstances, such as a change in the name/legal status of the distributor or transfer of business.

Fund Distribution and Channel Management Practices (Part 5)

ARN Surrender: The old ARN has to be surrendered and no further business can be done under that ARN, once the AUM transfer is complete.
AUM Transfer Procedure: AMFI has prescribed a detailed procedure for effecting such a change.

Key Concepts in Mutual Fund Distribution

Distributor Revenue: Mutual fund distributors earn revenue in the form of commission from mutual funds for distribution of the schemes.
Common Account Number (CAN): CAN is a single reference for all mutual fund investments of an investor in MF Utilities.
Transaction Platforms: Platforms like MF Utilities and MF Central connect investors, RTAs, distributors, banks, and AMCs for mutual fund transactions.

Regulatory Updates

SEBI’s 2025 Circular: Investors will no longer bear transaction charges and upfront distributor commissions after SEBI’s 2025 circular.
Allowed Distributors: It is False that only individuals are allowed to distribute mutual funds in India, as other entities can also distribute mutual funds.

Sample Questions and Answers

Question 1: Only individuals are allowed to distribute mutual funds in India. Answer: b. False
Question 2: In what form do mutual fund distributors earn revenue? Answer: a. Commission from mutual funds for distribution of the schemes
Question 3: What is the Common Account Number (CAN) in MF Utilities? Answer: b. A single reference for all mutual fund investments of an investor
Question 4: Which platforms connect investors, RTAs, distributors, banks, and AMCs for mutual fund transactions? Answer: d. MF Utilities and MF Central
Question 5: Which of the following costs will investors no longer bear after SEBI’s 2025 circular? Answer: b. Transaction charges and upfront distributor commissions