Chapter 5. Fund Distribution and Channel Management Practices

Learning Objective

This unit seeks to give you an understanding of the distribution channels through which mutual fund schemes reach the investors, and how these channels are managed.

The changing competitive context has led to the emergence of institutional channels of distribution, to supplement the individuals who distribute mutual funds. Institutional channels build their reach through employees, agents and sub-brokers.

AMCs keep exploring newer channels of distribution to increase the size of assets managed.

The internet has increased the expectations of advice that investors have from their distributors.

The stock exchange brokers have become a new channel for distribution of mutual funds. These brokers too need to pass the prescribed test, get the AMFI Registration No. and get them empanelled with AMCs whose schemes they want to distribute.

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.

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.

• Investor, such as a trust or a company can invest in a fund, depends on the list of eligible investors in the OD

• Any investor, who becomes a foreign citizen after investing in a fund, has to be compulsorily redeeming the units after obtaining foreign citizenship.

• Therefore any Indians seeking foreign citizenship should redeem their units.

• FIIs can invest in mutual funds. They invest through the Non-resident rupee account called NRE account.

• Investors have the right to receive redemption proceeds within 10 days.

• Investors cannot sue the Trust as they are the Trust and can’t sue themselves

• An open ended fund opens for sale and repurchase within 30 days from the date of closure of the IPO/NFO

• With the approval of 75% investors of the unit capital, the AMCs services can be terminated, or the scheme can be wound up.

• If a fund does not redress their complaint investors can go to SEBI

Who can invest in Mutual Fund in India

• Residents of Indian including,

• Resident Indian Individual/HUF
• Indian companies/Partnership Firms
• Indian Trusts/Charitable Institutions
• Banks/Finance Institutions
• Non-Banking Finance Companies (NBFC)
• Insurance Companies
• Provident Funds

• Non Resident Including

• Non-Resident Indian, & persons of Indian origin
• Overseas Corporate Bodies (OCBs)

• Foreign entities like FIIs (Foreign Institutional Investors) Registered with SEBI

• (Foreign Citizens/entities are not allowed to invest in MF in India)

Individual Agents & Distributors (National Distributors)

• An individual agent (advisor) is the broker between fund and the investor.

• Instead of having to deal with several individual distributors, a fund can interact with Distribution Company that has several employees or sub broker under it.

• These sub brokers are the agents of main distributors and these sub brokers will not at all having any relation with AMC.

• All persons engaging in MF sales have to pass AMFI certification test. Even employees of distributors, bank etc has to clear AMFI exam.

• It is mandatory to get ARN (AMFI Registration Number) from AMFI after passing the AMFI exam.

• Agents can sell products of multiple mutual funds.

• Agents are appointed after they clear the AMFI exam and sign an agreement with the AMC on non-judicial stamp paper.

Commission Rates for MF Distributors

• Commission payable to distributor is not fixed. It varies from AMC to AMC and Scheme to Scheme.

• Upfront commission for open ended scheme may vary from 1.5% to 2.5% whereas for ELSS scheme it varies from 2% to 3.5%

• Apart from upfront commission, agent also entitled to get Trail commission which varies from 0.4% to 0.6% paid on quarterly basis.

• As per SEBI rules, Distributor (MF Advisor) get commission on investments made through them but they are not entitled to get commission in their own investment.

SEBI Advertising Code

• The dividends declared or paid shall be mentioned in rupees per unit along with the face value of each unit of that scheme

• Only compounded annualized yield can be advertised if the scheme has been in existence for more than 1 year.

• Annualized yield when used must be shown for lat 1 year, 3 years, 5 years ad since launch of the scheme

• For funds in existence for less than 1 year, performance may be advertised in terms of total returns and such returns should not be annualized.

• Performance should compare with appropriate benchmarks only.

• Advertisements showing yields should display a sentence that “Past performance may or may not sustained in future”