FUND DISTRIBUTION AND

CHANNEL MANAGEMENT

By Ishaan Kumar
 Role Of Mutual Fund Distributors

The mutual fund distributor’s job is to assess the needs,

limitations,
resources and financial goals of the investor. This analysis would
help the mutual fund distributor arrive at a suitable asset
allocation plan for the investor.
Fund Distribution And Channel Management Practices

 Independent Financial Advisors

 Non-bank distributors
– Broking firms
– Securities distribution companies
– Non-banking finance companies
 Banks
 Internet
 MF Utilities: A transaction aggregating platform that connects investors, RTAs, distributors,
banks, AMCs and others.
 Stock exchanges
– Close-ended schemes are required to be listed in a stock exchange
– ETFs are bought and sold in the stock exchange
 Computer-based and Mobile-based Apps offered by
distributors
 Electronic platforms created by the AMCs
 Allowed to sell units of simple and performing mutual fund
schemes
– Simple and performing mutual fund schemes comprise of
diversified equity schemes, FMPs and index schemes that
have returns equal to or better than their scheme benchmark
returns during each of the last three years
 Pre-requisites To Become Distributor Of Mutual
Funds
 The individual needs to pass the NISM Certifying
Examination prescribed by SEBI.
 Distributors / employees who were above the age of 50
years, and had at least 10 years of experience as on may,
2010 can obtain the certification either by passing the NISM
certification examination or qualifying for Continuing
Professional Education (CPE) by obtaining such classroom
credits as may be specified by NISM from time to time.
 But they need to attend a prescribed refresher course.
KYD Requirements:-

 Document verification and bio-metric process.

 Self-attested copy of the PAN card and specific documents as proof of address to be
submitted along with application form at the CAMS- Pos.
 Bio-metric process consists of taking the impression of the index finger of the right
hand of the ARN holder.
 In case of non-individual distributors, bio-metric process will be conducted on specified
authorized persons.
 After passing the examination and completing KYD requirements, the next stage is to
register with AMFI.
 On registration, AMFI allots an AMFI Registration Number (ARN).
 Conditions for Empanelment

 Request for Empanelment Form to be filled which provides the basic details:-
 Personal Information of applicant:-Name of person, age, trade Name,
Contact Information, ARN, PAN, Income tax, category.
 Names and contact information of key people handling sales and operations.
 Business details.
 Bank details.
 Nominee.
 The applicant also needs to sign a declaration.
 Revenue Structures

 The scheme application forms carry a suitable disclosure to the effect that
the upfront commission to distributors will be paid by the investor directly to
the distributor, based on his assessment of various factors including the
service rendered by the distributor.
 Two kinds of commission are earned by distributors:-
 Initial or Upfront Commission:- The scheme application forms carry a
suitable disclosure to the effect that the upfront commission to distributors
will be paid by the investor directly to the distributor, based on his
assessment of various factors including the service rendered by the
distributor.
 Trail commission, calculated as a percentage of the
net assets attributable to the Units sold by the distributor
 AMCs pay a trail commission for the period the investment
is held in the scheme.
 Since trail commission is calculated as a percentage on
AUM, distributors get the benefit of valuation gains in the
market
 Additional commission for promoting mutual funds in small towns
SEBI has allowed mutual funds to charge additional expenses, which can
be used for distribution related expenses, including distributor
commission.
 Transaction Charges
Type of Investor Transaction Charges (Rs.)
(for purchase/subscription of Rs.
10,000 and above)
First time mutual fund investor Rs. 150/-
Investor other than first time mutual Rs. 100/-
fund investor
 Applicability of GST on distributors commission
The Goods and Services Tax (GST) became applicable with effect from July 2017. GST is
payable by any person making taxable supplies of goods/services and whose annual
turnover exceeds Rs. 20 lakhs. Additionally, on certain goods and services specified by
the Government, tax is to be paid by the recipient, under reverse charge instead of the
supplier. A mutual fund distributor, who has registered and obtained a GST number would
be required to raise an invoice for the commission, and pay the GST to Government.
 Commission Disclosure mandated by SEBI
I. Multiple point of presence (More than 20 locations)
II. AUM raised over Rs. 100 crore across industry in the non-institutional category but including high
networth individuals (HNIs).
III. Commission received of over Rs. 1 crore p.a. across industry
IV. Commission received of over Rs. 50 lakhs from a single Mutual Fund/AMC.
 Due Diligence Process by AMCs for Distributors of Mutual Funds
a) Multiple point presence (More than 20 locations)
b) AUM raised over Rs. 100 crore across industry in the non-institutional category
but including high networth individuals (HNIs)
c) Commission received of over Rs. 1 Crore p.a. across industry
d) Commission received of over Rs. 50 Lakhs from a single mutual fund
 Nomination facilities to Agents/Distributors and Payment of Commission
to Nominee
 Nomination facilities to Agents/Distributors and Payment of
Commission to Nominee
In case of the death of a mutual fund distributor (MFD), there
would be a loss of income for his/her family. Therefore, to provide
protection against loss of income to the mutual fund
distributor’sfamily, AMFI has advised its members (AMCs) to offer
nomination facility to the AMFI registered mutual fund distributors,
as a uniform practice across the industry to enable the nominee to
receive commission. Therefore, the AMCs provide nomination
facility to the mutual fund distributors at the time of empanelment.
 Change of distributor

A distributor can initiate a change in the distributor code in the folios of one’s clients on
account of any of the following:
i. Change in the name/legal status of the distributor (such as an individual MF distributor
converting his MF distribution business to a partnership firm, a partnership firm
converting itself into Limited Liability Partnership (LLP), a private limited company
converting itself into a public limited company or vice versa;
ii. Merger/acquisition/consolidation/transfer of business/new code acquired within the
same group in case of non-individual distributors;
iii. Transfer of AUM consolidation initiative within the same family/close relatives in case
of individual distributors; and
iv. Transfer of business by individual distributors
 Sales Practices
 Distributor actions must be in the interest of the unit
holders
 Distributors have to follow AMFI's code of ethics (ACE) as
well as well as those prescribed by the concerned AMC,
Amfi and Sebi.
 AMFI and fund houses have put in place a set of
guidelines to be followed by the distributors
 These include the following:
 Distributor is accountable for the activities of the sub-brokers
 Distributors must have complete knowledge of the product on offer.
 Distributors must know their clients’ needs and profile.
 The product chosen must meet the clients’ requirements.
 Distributors must encourage good investment habits such as long-
term and regular investment.
 Distributors must provide good and efficient after-sales service.
 Summary
 Individuals, HUFs, Companies, Partnerships, Trusts, Mutual
funds, insurance companies, banks, NRIs, FIIs, PIOs are eligible
to invest in mutual funds
 OCBs and foreign citizens are not eligible
 Retail investors may be individuals, NRIs, minors, HNIs
 Institutional investors require charter document, Board resolution
and signatures by authorised signatories to invest in mutual funds
 IFAs establish long term personal relationships with the investors
 Institutional distributors provide benefit of large network of clients and
branches, research and geographical research
 Mutual funds are traded on stock exchange platforms through brokers
between 9am and 3pm. NSE’s NEAT MFSS and BSE’s STAR Mutual Fund
Platform
 Distributors must clear NISM’s MFD certification exam (3 years validity),
obtain ARN before getting empanelled
 Initial commission is paid by investors while trail commission is paid by
the AMC
 Distributors must follow ACE, AGNI and guidelines prescribed by the AMC