Chapter 5

Fund Distribution and Channel Management Practices

 What are the categories of
investors eligible
•Resident Individuals
to buy MF units?
• Indian Companies
• Indian trusts and charitable institutions
• Banks
• NBFC’s
• Insurance companies
• Provident funds
• Non-resident Indians / PIO
• OCB’s
• SEBI registered FII’s
 Important Points
• Distributor should look up the offer document to see which
category of investors are allowed to invest in any particular
scheme of the fund, as it is possible that some categories are not
allowed to invest in some schemes.
• For example, charitable trusts are not allowed to invest in some
category of schemes in some funds. So in this case distributor
should refer offer document.
• Any investor who becomes a foreign citizen after investing in a
fund, has to compulsorily redeem the units after obtaining foreign
citizenship
• FIIs can invest in Mutual Funds through their Non Resident
Rupee Account
• RBI has granted a blanket permission to NRI, OCB and FIIs; every
investment does not require RBI approval.
 Individual and Institutional
Distribution Channels
• Individual distributors are known as Independent Financial Advisors
(IFAs)
– Agreement with AMC to act as distributor
– Establish personal long term contacts across investment products

• Institutional distributors can be distribution houses, banks, or non-

banking finance companies
– Employees and Sub-brokers
– Wide branch network and large client base
– Greater geographical reach
– Standardised process for acquiring, servicing and advising institutional
distributors
– AMCs have to deal with one entity rather than several individuals
– AMC’s channel managers service the institutional distributors
– Provide in-house research and product recommendations to investors
 Newer Channels of Mutual Fund Distribution

• Online Mutual Fund Distribution

– Websites allow investors to make investments online, view current holdings at latest NAV and
conduct sale/purchase transactions
– Investor creates an account with mutual fund/distributor website
– Account is password protected
– Convenient and paper-less transactions
– No cheque writing is required, payment can be made through credit card.

• Distribution through Stock Exchanges

– Sebi has allowed stock exchange brokers to conduct mutual fund transactions through their
trading platforms with the NSE and BSE
– Brokers must clear NISM MFD Certification, obtain ARN and empanel as distributor with AMC
– NSE’s NEAT MFSS and BSE’s STAR Mutual Fund Platform
– Open from 9am to 3 pm
– Mutual funds tie up with the stock exchanges to offer their funds through trading platforms
 Appointment of Distributor
• AMCs appoint mutual fund distributors by entering into distribution agreements
– A distributor has to be empanelled by a mutual fund before being able to distribute its
products to investors.

• Pre-requisites for being appointed as a distributor:

– Individual distributors and employees or representatives of institutional distributors have to
clear the NISM Mutual Fund Distributor (MFD) certification examination
– Need to obtain the AMFI Registration Number (ARN) before they can seek empanelment with
AMCs
– Institutions in the distribution business also need to get registered with AMFI
– The certification examination is valid for a period of three years, after which it has to be
revalidated by attending a Continuing Professional Education (CPE) training.

• Empanelment form must be filled up while seeking empanelment

– Personal details, names of key people handling sales and operations, business details.

• Appointment / termination of distributor is the discretion of the AMC

– Does not require SEBI approval.
 Distribution Agreement
• Lists down the terms and conditions of the appointment of the distributors

• AMC has the power to terminate agreement at any time, after due notice

• Follow the Code of Ethics by the AMFI and Mutual funds

• Clauses of the agreement:

– Ensure that the KIM is given along with the application form to investors
– Inform investors that there is no recourse to the distributor for any problems in the investment.
– Offer units only at the public offering price currently in effect and not offer differential pricing.
– Commit to keeping the transactional details confidential.
– Commit to abide by instructions from the AMC and the statutory codes, guidelines and circulars.
– Not issue advertisement or publicity material other than that provided or approved by the AMC.
– Ensure that the risk factors are mentioned along with performance and other related
information.
– Provide all the information that the AMC may ask for from time to time.
– Ensure that all employees who are engaged in selling or marketing of mutual funds have an ARN.
– Undertake not to attract investors through temptation of rebate of commission or gifts.
 Distributor Commissions
• There are no SEBI rules on the minimum or maximum rate of commission.
– influenced by commissions paid by other competing funds and the type of scheme

• Distributors are not allowed to charge commissions on their own investment.

• Initial Commission is paid up-front.

– Entry load charged from investors was used by mutual funds to pay commissions to brokers
– Entry load has been banned since Aug 1, 2009
– Investors have the power to decide the payment to advisors for their services
– Distributors have to disclose the commissions they earn on comparable schemes when they
recommend a scheme to the investor

• Trail commission is paid as long as the investor remains invested in the fund.
– Calculated on the current market value (units brought in by the distributor x current NAV of
the units)
– Paid for the time period of which the investor remains with the fund
– AMFI has imposed a ban on trail commission for transferred assets
– Money saved by AMC is to be used for investor education
 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:
– A mutual fund is not accountable for the activities of the sub-brokers of
a distributor.
– 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.
 SEBI Advertisement Code
• SEBI has prescribed advertisement code for mutual funds which is
mandatory and is as under:
– Standard measures to compare such as Annual Yield, CAGR etc.
– Annualised yields for at least one, three, five years & since launch
– For less than 1 year performance, Absolute Return without annualisation
– Past gains may not repeat in future
– Risk factors prominently stated
– Appropriate benchmark to be chosen
– Any ranking of fund to be explained
– In hoardings/posters , the statement, “ MF investments are subject to market
risks, read the offer document carefully before investing” , is to be displayed in
black letters.