CHAPTER 6 FUND DISTRIBUTION AND CHANNEL MANAGEMENT PRACTICES

- The mutual fund distributor’s job is to assess the needs, limitations, resources and financial goals of the investor.

- Mutual funds are distributed in India to the investors through multiple channels, viz., individual mutual fund distributors, bank branches, national distributors through their branches or their sub- agents, post offices, and directly by the AMCs.

- The traditional non-institutional channels generally operate through

 Their own branch offices and employees

 A network of sub-agents

- Non-individual entities include partnerships, regional distributors, national distributors, NBFCs, banks, stock brokers, etc.

- NSE’s platform is called NMF II Platform. BSE’s platform is BSE STAR Mutual Funds Platform. NMF II platform of NSE has two versions one for trading members and one for distributors.

- The stock exchanges only offer a transaction platform, but they do not replace the RTAs.

- The exchanges do not offer settlement guarantee. Responsibility for settlement is with the AMC.

- MF Utilities (MFU) is a transaction aggregating platform that connects investors, RTAs, distributors, banks, AMCs and others. It offers a Common Transaction Form to transact in multiple schemes across participating mutual funds.

- Investors who register on the MFU are allotted a Common Account Number (CAN) under which all their mutual fund holdings are consolidated.

- MFU allows a single payment for multiple subscriptions made under a single form.

- The bank and nomination details provided to the MFU at the time of registering for the CAN will override the information provided in the folios.

- Pre-requisites to become Distributor of a Mutual Fund

a. Obtaining NISM Certification

b. Know Your Distributor Requirements

c. Obtaining AMFI Registration Number

e. Empanelment withAMCs

- To Obtain certificate

1.) The individual needs to pass the NISM certification examination mandated by SEBI.

2.) Persons who have attained the age of 50 years or who have at least 10 years of experience in the securities markets in the sale and/ or distribution of mutual fund productsas on May 31, 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.

- The KYD process consists of document verification and bio-metric process.

- An ARN holder can become a distributor or can become agents of a distributor who is already empanelled withAMCs.

- The employees of the distributor need to obtain an Employee Unique Identification Number (EUIN) from AMFI apart fromAMFI Registration Number (ARN).

- There are “no” SEBI regulations regarding the minimum or maximum commission that distributors can earn.

- As per SEBI circular dated October 2018, AMCs shall adopt full trail model of commission in all schemes, without payment of any upfront commission or upfronting of any trail commission, directly

or indirectly, in cash or kind, through sponsorships, or any other route.

- Upfronting of trail commission is allowed only in case of inflows through Systematic Investment Plans (SIPs) of upto Rs. 3,000 per month for an investor investing in mutual fund schemes for the

first time. In other cases, Upfront commission will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.

- Distributor is paid a commission for as long as the investor’s money is held in the fund.

- SEBI has mandated Mutual Funds / AMCs to disclose on their respective websites the total commission and expenses paid to distributors who have

1.) Multiple point presence (More than 20 locations)

2.) AUM raised over Rs. 100 crore across industry in the non-institutional category but including high net worth individuals (HNIs)

3.) Commission received of over Rs. 1 Crore p.a. across industry

4.) Commission received of over Rs. 50 Lakhs from a single mutual fund

- A transaction charge is paid to distributors for investments of Rs. 10,000 and over.

- For existing investors the distributor can charge Rs. 100 per transaction and for new investors across mutual funds, they can charge Rs. 150 per transaction.

- In case of SIP's, transaction charges are applicable only if the total commitments through SIPs amount to Rs. 10,000 and above. The transaction charge will be recovered in 3-4 installments.

- Mutual Fund distributors can claim commission on investments made through them by their clients. However, no commission is payable on their own investments.

- Trail commission is calculated as a percentage of the net assets attributable to the Units sold by the distributor. The commission payable is calculated on the daily balances and paid out periodically to

the distributor as per the agreement entered into with AMC. (quarterly basis or monthly basis)

Trail commission for the day =AUM X trail commission rate p.a./365

- Distributors who have chosen the ‘opt-out’ option i.e. decided not to charge transaction charges based on type of the product e.g. they can decide not to charge it for debt schemes.

- The distributor cannot choose to charge transaction charge from one investor and not from another.

- To provide protection against loss of income to the mutual fund distributor’s family, AMFI has advised its members (AMCs) to offer nomination facility to the AMFI registered mutual fund distributors.

- A nominee/legal heir need not be an ARN holder to claim and receive the commission. Nominee shall receive the commissions only as trustee for the legal heirs of the deceased MFD.

- In case of change of distributor code in a folio, no commission would be payable to any distributor, neither the old one nor the new one.

- If the change of distributor code is initiated by the investor on account of voluntary cessation of business by the distributor, the new distributor would get the trail commission.