The Role & Importance Of Mutual Fund Distributors :
- Investors build portfolios using mutual fund schemes to meet financial goals, often with expert help.
- Mutual fund distributors assist investors by assessing their needs, resources, and goals to suggest suitable schemes.
- Fund managers, in contrast, analyze market, industry, and economic data to construct fund portfolios.
- Distributors focus on the investor’s situation; fund managers focus on market dynamics.
- Both roles are essential to helping investors achieve financial objectives.
- The chapter also covers types of distributors, distribution modes, prerequisites, earnings, SEBI commission rules, due diligence by AMCs, nomination, and distributor changes.
Different Kinds Of Mutual Fund Distributors :
- Distribution Channels: Mutual funds in India are distributed via individual agents, banks, national/regional distributors, post offices, and directly by AMCs using paper or digital platforms.
- Individual Distributors: Traditionally, individuals (like LIC and UTI agents) have played a key role in financial product distribution, often operating solo or with minimal staff.
- Growth Path: Many mutual fund distributors begin as individuals and later expand into larger entities, forming part of the non-individual channel.
- Non-Individual Entities: Includes partnerships, NBFCs, banks, stockbrokers, and national distributors—some are termed institutional distributors.
- Business Models: Operations differ—employees (fixed cost, salary-based) vs. sub-agents (variable cost, commission-based).
- Banks as Distributors: Banks, including PSU, private, foreign, and co-operative, distribute mutual funds, targeting different customer segments based on wealth.
- Stock Brokers & NBFCs: Use both employee and sub-agent models, servicing both retail and wealthy clients.
- Regional & National Distributors: Some firms specialize in mutual fund distribution at regional or national levels.
- Digital Platforms: New e-commerce and online platforms have emerged as distributors under SEBI’s Execution Only Platform (EOP) guidelines.
Modes Of Distribution :
- Traditional vs. Digital Modes: Mutual fund distribution has shifted from paper-based transactions to digital platforms, though physical methods still persist.
- Hybrid Usage: Some distributors use both digital and physical methods, catering to different investor preferences.
- Online Channel Partners: Distributors now use websites to facilitate wider and easier investor access, removing geographical barriers.
- Stock Exchange Platforms: NSE and BSE offer mutual fund transactions through platforms like NMF II and BSE StAR, enhancing accessibility and supporting SIPs, STPs, and SWPs.
- MF Utilities (MFU): MFU aggregates transactions and offers investors a Common Account Number (CAN) for consolidated holdings across AMCs with multiple payment options.
- Mobile and Computer Apps: Distributors provide apps on mobile devices for easy and paperless investing.
- AMC Platforms: AMCs have developed their own web and mobile tools, including SMS and WhatsApp services, enabling direct investor transactions.
- New-age Platforms: Tech platforms like Groww, Kuvera, and Paytm Money offer low-cost, user-friendly direct mutual fund investments.
Pre-requisite To Become Distributor Of Mutual Fund :
- Certification Requirement: Distributors must pass the NISM Series V-A exam mandated by SEBI, unless exempted due to age (50+) or 10+ years of experience as of May 31, 2010.
- KYD Compliance: SEBI requires completion of the Know Your Distributor (KYD) process, including PAN and address verification, and biometric authentication via CAMS-PoS.
- AMFI Registration: After certification and KYD, distributors must register with AMFI to obtain an AMFI Registration Number (ARN). Minimum age is 18.
- AMC Empanelment: Distributors with ARN can empanel with multiple AMCs or work under an existing empaneled distributor to sell mutual fund schemes and earn commissions.
- Institutional Distributors: Institutions must register with AMFI; employees must pass NISM V-A and obtain a Unique EUIN (no separate ARN needed).
- Empanelment Process: Includes submission of a detailed form with business, personal, and financial information, plus a declaration to follow AMC rules and regulations.
- Online Transition: From October 1, 2024, ARN and EUIN applications will be accepted only online via the AMFI website; paper-based applications are discontinued.
Revenue For A Mutual Fund Distributor :
- Commission Models: Distributors earn via transaction-based or AUM-based (trail) commissions. The former is one-time, while the latter is periodic and ongoing.
- Regulatory Changes: SEBI (Oct 2018) mandated full trail model for all schemes—no upfront commissions allowed except in specific SIP carve-outs.
- SIP Carve-out:
- Allowed for first-time investors with SIPs up to ₹3,000/month.
- Only the earliest SIP qualifies.
- Commission paid upfront for a maximum of 3 years, amortized daily, and recoverable if SIP discontinues.
- Trail Commission:
- Calculated on the daily net asset value of units sold.
- Paid monthly or quarterly by AMCs.
- Encourages long-term relationships and better service by distributors.
- Not paid on self-investments of distributors.
- Disclosure Norms: Distributors must disclose commissions from similar schemes across different AMCs when making recommendations.
- Upfronting Example: If trail commission for July is ₹849.31, it can be paid at the start for qualifying SIPs without adjusting for NAV changes.
- Incentives for B-30 Locations: Higher commissions allowed for distributors mobilizing funds from small towns.
- Transaction Charges:
- ₹150 for first-time investors; ₹100 for others on investments ≥ ₹10,000.
- Deducted from the investment; certain transactions (e.g., direct, STP, switches) are exempt.
- Distributors can opt-out of charging transaction fees—but must apply it uniformly across all investors.
- GST Applicability:
- Registered distributors must invoice AMCs and pay GST.
- AMCs pay GST under reverse charge for commissions to unregistered distributors.
Commission Disclosure Mandated By SEBI :
- SEBI Mandate: Mutual Funds/AMCs must disclose total commissions and expenses paid to certain distributors on their websites.
- Disclosure Criteria: Applies to distributors with >20 locations, >₹100 crore AUM, >₹1 crore annual commission, or >₹50 lakh from one AMC.
- Reporting to AMFI: AMCs must also report this data to AMFI, which publishes consolidated data on its website.
- Additional Disclosures: Annual distributor-wise data must include gross inflows, net inflows, AUM, and AUM-to-inflow ratio, along with any sponsor affiliation.
- High Turnover Monitoring: Distributors with portfolio turnover ratios exceeding twice the industry average require additional due diligence by AMCs.
Due Diligence Process By AMCs For Distributors Of Mutual Funds :
- SEBI mandates AMCs to follow a due diligence process for distributors meeting certain criteria:
- Presence in over 20 locations,
- Raised AUM over ₹100 crores (non-institutional, including HNIs),
- Earned over ₹1 crore commission across the industry annually,
- Earned over ₹50 lakhs from a single mutual fund.
- Due diligence is required during empanelment and review of distributors.
- The ‘fit and proper’ criteria include:
- Business model, experience, and industry proficiency,
- History of regulatory/legal issues and corrective actions taken,
- Assessment of associates and subsidiaries on the same grounds,
- Organizational separation of sales from:
- Customer risk evaluation, and
- Suitability assessment of mutual fund schemes.
Difference Between Distributors & Investment Advisors :
- Investment Advisor Definition: A person giving investment advice for a fee is considered an investment advisor, excluding mutual fund distributors giving incidental advice.
- Role Clarity: Distributors cannot present themselves as investment advisors; both functions (advisory and distribution) must be separate and not compensated simultaneously.
- Advisory Services: Distributors offering advice must ensure product suitability based on customer risk appetite, with no exceptions.
- Execution-Only Transactions: If advice is not appropriate, written acknowledgment from the customer is required, and only standard transaction charges can be levied.
- No Third Category: Customer interactions must be classified strictly as either “advisory” or “execution-only”.
- Conflict Disclosure: Distributors must disclose conflicts of interest when selling their own group’s mutual fund products.
- Compliance Measures: Distributors must have risk assessment, internal audit, and investor grievance mechanisms in place.
- Regulatory Guidance: Distributors can give advice only if incidental to distribution and must never claim to be financial planners or advisors.
- SEBI Regulations: Distributors must ensure product suitability to avoid mis-selling, which includes misleading statements or omission of key information.
Nomination Facility To Agents/Distributors And Payment Of Commission To Nominee :
- Nomination Facility: AMFI advises all AMCs to offer nomination facilities to mutual fund distributors (MFDs) during empanelment to ensure their family can receive commissions after death.
- Commission Payment: Commissions are paid to nominees or legal heirs of deceased MFDs, provided the ARN was valid at the time of death and not suspended.
- No New Business: No new transactions are allowed under the deceased MFD’s ARN code; existing systematic transactions can’t be modified.
- Simplified Process for Nominees: If a nominee is registered, commission can be paid upon submission of basic documents like a death certificate, without needing succession/legal heir certificates.
- Eligibility and Restrictions:
- Nominee/legal heir doesn’t need to be an ARN holder to receive commission.
- Commissions are only for assets procured during the MFD’s valid ARN period.
- Commissions stop once AUM under the deceased’s ARN becomes nil.
- Role of Nominee: The nominee acts as a trustee for the legal heirs and can’t transfer assets unless specifically requested by investors and if the nominee is a valid ARN holder.
- Notification and Transfer Conditions: AMFI must be notified of the MFD’s death with a certified death certificate. For AUM transfer, the nominee/legal heir must have a valid, KYD-compliant ARN, and meet all compliance requirements.
Change Of Distributor :
- Trail commission compensates distributors for mobilizing funds and ongoing investor services.
- Investors can change their distributor or go direct via written request, with no reason or NOC required.
- In case of a change in distributor code, no commission is paid to either the old or new distributor.
- Exception: If the change is due to voluntary cessation of the original distributor’s business, the new distributor gets the commission.
- Distributors can initiate change in specific cases: legal status change, mergers/acquisitions, family-based AUM transfer, or business transfer.
- Transfer of AUM is allowed only if the full AUM moves to a KYD-compliant ARN holder and the old ARN is surrendered.
- AMFI has outlined a detailed procedure for such distributor changes.