5.1  Distribution Channels

5.1.1 Traditional Distributional Channels

  • Traditionally, distribution of financial products like UTI Units, LIC policies, Fixed Deposits and small savings instruments were limited to individual agents. The advertising of such products was through mass media and the agents.
  • Due to various developments in the financial products market like growth of Mutual Funds, insurance products, better awareness, technology and bigger reach, there was a need for an increase in distribution channels.

5.1.2 Emergence of Newer Distribution Channels

This has resulted in introduction of new distribution channels, both institutional and non-institutional, like AMCs, Independent Financial Advisors, Post Offices, Self-help Groups, Banking Companies, Non-Banking Finance Companies, houses, Stock Exchanges and Internet.

  • Institutional Channels of distribution also emerged with Brand Building, standardised processes and advanced technology. These channels work through a large base of professional  employees and sub brokers. They started reaching investors with an objective to become a pan India network.
  • AMC (Asset Management Company) is the manufacturer of investment products. AMCs prefer to deal with Institutional Distributors to reach out to hundreds of locations through network of the institutional  channels of distribution.
  • Many individual agents and sub brokers got associated with the Institutional Distributors  to cater to the investors with  the use  of latest  technologies and better services, which otherwise individual sub brokers could not have afforded.
  • Consequently, now the distribution channel is a mix of Individual Independent Financial Advisors, brokerage houses, NBFCs, Banks and Institutional Distributors.
  • AMCs are using internet  to have a direct contact with the investors through their websites. More and more investors are making investment in direct plan of  various schemes through the web sites of Mutual Funds.
  • SEBI has facilitated buying of MF units through stock Exchanges. Stock Exchanges have a large network of brokers and trading Terminals. This is a very cost effective high volume low margin channel.
  • PSU Banks, Private and Foreign banks also got engaged in distribution of MF products since banks have a reach in all parts of the country.

5.1.3  New Cadre of Distributors

  • A new cadre of distributors comprising of postal agents, Retired Bank/Government officers or retired teachers with a service of at least 10 years  has also been authorised by SEBI to function as distributors for handling only the Simple and Performing Mutual Fund Schemes.
  • Simple and performing MF schemes comprise of Fixed Maturity plans, Liquid and Money market schemes, Retirement benefit schemes with tax benefits, diversified equity schemes and Index schemes. All these should have equal to or better returns than their respective benchmark schemes during each of last three years. AMCs are supposed to disclose such schemes on their websites.
  • A system has been put in place by AMCs to ensure that the new cadre of distributors sell only the eligible schemes. AMCs will reject any transaction routed through such new cadre if it is for any scheme other than the eligible schemes.
  • A New certification examination and CPE program has been designed by NISM for this new cadre which is called “Series V-B”

5.1.4 Qualifications for becoming a Mutual Fund Distributor

  • An AMC (Asset management Company) can appoint an Individual, a Distribution Company, a Bank or any NBFC as a distributor.
  • All MF Distributors, agents or any persons employed for distribution of MF products need to pass NISM Series V-A exam. These persons need to  obtain a certification from National Institute of Securities Market (NISM) as required by SEBI.
  • Persons having attained the age of 50 years or those who have at least 10 years’ experience in distribution/sale of MF products as on May 31, 2010 can obtain certification of NISM. For obtaining this certification, they have to  pass  the NISM certification examination. They can get this certification by qualifying for Continuing Professional Education (CPE) by obtaining such classroom credits as may be specified by NISM from time to time.

5.1.5 Compliance of KYD (Know your Distributor) requirement

  • As per SEBI guidelines and as mandated by the Association of Mutual Funds in India (AMFI), All MF distributors need to complete “Know Your Distributor” (KYD) requirements. KYD requirement means  verification of correctness of information submitted by holders of AMFI Registration Number (ARN)
  • The KYD process involves submission of self attested copy of PAN Card  and Address Proof and verification of  these self attested copies with the original documents. KYD requirement  also involves Bio metric process of taking the impression of the index finger of the right hand of the ARN holder  at CAMS-POS. Bio metric process will be conducted on specified authorised persons if distributor happens to be a non individual.

 5.1.6  Registration with AMFI 

  • After completing KYD requirements, a registration with AMFI is required. AMFI allots an AMFI Registration Number (ARN) after verifying the NISM certification and KYD compliance. 
  • The employees of institutional ARN holders need to obtain an Employee Unique Identification Number (EUIN) from AMFI.

5.1.7 Empanelment with AMC

  • Thereafter, the ARN holders need to get  empanelled with AMCs. For this purpose, ARN holders need to submit Empanelment Form containing certain details and declarations relating to personal information, confidentiality, advertising, no pass back of commission etc.

5.2 Channel Management Practices

5.2.1  Commission Structures

  • SEBI has not specified the commission structure to distributors. However, SEBI has fixed  total expense ratio, popularly known as TER. TER puts limit on the maximum total expense  including commission to distributors  that can be incurred by a particular MF Scheme.
  • Commission structure varies from AMC to AMC, Commission structure varies even from scheme to scheme  within same AMC.
  • Trail commission is payable by the AMC to the distributors as a percentage based on the net asset value (NAV) attributable to the units sold by the distributor. Trail Commission, normally payable quarterly or monthly, is calculated on the daily balances of NAV. The commission is paid till the investment stays with AMC.
  • No commission is payable to the distributors for their own investments.
  • No commission is  payable for Investments made under “Direct” mode of any scheme.

5.2.2  Transaction Charges

  • Apart from Commission, a transaction charge is also paid to distributors for Investments of Rs. 10000/- and above except for direct investments.
  • Distributor is paid Rs. 100/- per transaction for investment from an existing investor. Distributor  is  paid 150/- per transaction for a new investor in order to increase the investor base.
  • The Transaction charges are deducted from the gross investment of the investor and paid to distributor. Gross investment minus transaction charges  is invested.
  • Transaction charges for Systematic Investment Plan (SIP) are applicable only if total commitment through SIP is Rs. 10000/- and above. The transaction charge will be recovered in three to Four installments.
  • Investor can not decide that he will not pay transaction charges. Only Distributor can decide whether he wants to charge. Transaction Charges or he does not want to charge transaction charges. Distributor can decide to  charge Transaction Charges for one type of product and may not charge for other type of products.

5.2.3  Disclosure of Commission

  • AMCs need to disclose the commissions and expenses paid to certain large distributors who satisfy certain conditions with respect to non institutional (retail and HNI) investors, on their websites. AMCs shall also submit such data to AMFI. AMFI shall also disclose the consolidated data in this regard on its web site.

5.2.4  Type of Plans – Direct and Regular

  • There are two routes for investors to invest in MF schemes which are generally called Direct Plan and Regular Plan.
  • Investment under Direct Plan is not routed through a distributor. Direct plan will have a lower expense ratio as there is no commission payable to the distributor. The Direct Plan will  have a separate NAV which will reflect the lower expenses ratio.
  • In Regular Plan, the investor mentions the details of distributor through ARN and based on ARN, the AMC pays Transaction Charges/ trail commission to the distributor. The expenses under the Regular Plan are higher because of commission to the distributor.

5.2.5 Sales and Advertisement Practices

  • Large distributors have got  a network  of  sub brokers working under them. Hence, being the principal, the distributor is liable for the acts and defaults of its  sub brokers.
  • The relationship of AMC/ Mutual Fund with the distributor is on Principal to Principal Basis. Hence, AMC is not liable for the acts or defaults of the distributor or distributor’s sub brokers.

5.2.6 AMFI code of conduct

All Distributors  doing selling or distribution of MF should have the knowledge of the provisions of AMFI Code Of Ethics (ACE) and AMFI Code of conduct for intermediaries of Mutual Funds (ACCIMF). These are discussed below:

  • Always put Investors interest at the top. The distributors must maintain high standards of ethics, integrity and fairness in all its dealings with concerned parties such as investors, Mutual Funds/AMCs, Registrars & Transfer Agents and other intermediaries. They should render, at all times,  high standards of service, exercise due diligence and ensure proper care.
  • Mutual Fund distributors have to disclose all the commission payable to them by AMC.
  • To observe, update and comply the regulations, guidelines, revisions and amendments issued by SEBI & other regulating authorities related to distributors, Selling, distribution and advertising practices. Be fully conversant with the key provisions of the Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM) as well as the operational requirements of various schemes.
  • Provide complete and updated information to the investors in the form of SAI, SID, addenda, performance reports, portfolio disclosure, fact sheet, risk factors and advice the investor in best possible manner.
  • Always maintain the confidentiality of all investor detail, deals and transactions by not disclosing them other than lawful causes.
  • Communicate all the information, terms and provide them documents related with anti money laundering, combating financing of terrorism, power of attorney, agreement and KYC documents.
  • The distributors as well as professionals working with them  for  sales/marketing  of mutual fund products must obtain EUIN (Employee unique identification number) from AMFI. The distributors must ensure that their employees selling mutual fund products must quote their EUIN at every investment application form.
  • Intermediaries must take all the necessary steps to protect the investors from any possible fraudulent activities. While filling the application form, investors details should be accurate and correct in every respect.
  • The distributors should not indulge in fraudulent or unfair trade practices, False or misleading commitments, concealing material fact while selling units of mutual fund scheme.
  • The distributors should be careful in attesting & verification process of documents. They should follow the guidelines prescribed by AMFI/KRA. They should keep themselves updated with the revisions and changes made by the authorities time to time.
  • In case of any failure in execution of ACCIMF, AMFI will issue a notice to the intermediary to seek written explanation. Intermediary has to reply it within 3 weeks. After a proper investigation, AMFI, depending on its findings, may issue warning. In extreme cases, AMFI can cancel the registration of distributor. The distributor has a right to file an appeal to AMFI in this regard.
  • The practice of sharing the part of commission with the investor or pass back of commission is banned as per the provision of Code Of Conduct.

5.2.7  Advertising Code for Mutual Funds

  • SEBI has mandated an advertising Code for Mutual Funds which needs to be followed strictly. As per this code, all advertisements whether print or any other media, Audio Visual, shall be accurate, true and fair. Advertisements will not be false or misleading in any manner.
  • All advertisements shall be accompanied by statutory warning stating “Mutual Fund Investments are subject to market risk, read all scheme related documents carefully”.
  • The other provisions related to the manner in which various information related to scheme performance etc., is to be given in the advertisement are provided in the SEBI’s Advertising Code in detail.
  • Where MF scheme is more than 3 years old, the performance advertisement will be provided in terms of CAGR for past 1,3 and 5 years and since inception. Point to point returns on a standard investment of Rs 10,000 shall also be shown. Performance and Expense Structure of Direct Plan and Regular Plan of the schemes  will be also clearly shown. Where scheme is existing for more than 1 year but less than 3 years, or 5 years, a footnote to this effect must be given. If  scheme is less than 1 year old, past performance shall not be provided.
  • In case of Money Market, cash or Liquid schemes, performance can be advertised by simple annualization of yield if performance is available for at least 7, 15 and 30 days.
  • The specified benchmark return should also be shown.
  • Advertisement of performance of a particular Mutual Fund scheme should include performance data of all the other schemes managed by the Fund Manager of that particular scheme. Performance Data of other schemes managed by the fund manager will disclose CAGR for a period of 1 year, 3 years and 5 years and respective scheme’s benchmark.
  • There are other restrictions related to the Fund managers of the scheme and their experience of the scheme which need to be followed while advertising.
  • Celebrity endorsement of Mutual Funds is permitted only at Industry level with prior approval of SEBI, subject to complying with the specified conditions.

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[WATU 12]

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