Fund distribution and channel management

This chapter is about you: how you qualify, how you are paid, and what you can and cannot do. It is the most heavily tested part of the syllabus for a practising distributor, and the numbers (transaction charges, ARN validity, trail arithmetic) are easy marks if you have them straight.

Becoming a distributor: NISM, KYD, ARN and EUIN

Anyone who sells mutual fund units for commission must hold an AMFI Registration Number (ARN). The route for an individual:

1. Be at least 18 years old. There is no minimum educational qualification.
2. Pass the NISM-Series-V-A certification examination (or, for a person aged 50 or above or with at least 10 years of experience in the securities market, complete the NISM continuing professional education programme instead).
3. Complete Know Your Distributor (KYD) with AMFI: identity and address verification using PAN and Aadhaar, and biometric or in-person verification.
4. Apply to AMFI for the ARN with the fee. The ARN is valid for 3 years and is renewed before expiry by completing a CPE programme (the NISM certificate itself is also valid for 3 years).

Corporate distributors (banks, broking firms, companies, partnerships) hold a corporate ARN, and every employee or relationship manager who interacts with investors must pass the exam and obtain an Employee Unique Identification Number (EUIN). The EUIN is quoted on every application form along with the ARN, so that advice can be traced to a person. If an application is submitted without advice the investor signs an "execution only" declaration instead. A missing or wrong EUIN must be remediated within the period AMFI allows, failing which the AMC withholds the commission on that transaction. Overseas distributors and senior citizens follow the same process with the exam or CPE condition as applicable.

A distributor who is also a SEBI-registered investment adviser faces restrictions: an individual cannot hold both registrations, and a corporate adviser must keep distribution in a separate division. A distributor may give incidental advice about the schemes being sold, but cannot call themselves an adviser or charge a fee for advice.

Channels through which funds are sold

• Individual distributors (MFDs): the largest channel by number, serving retail investors directly.
• Banks and national distributors: large corporate ARNs with branch networks and relationship managers, each with an EUIN.
• Stock exchange platforms: BSE StAR MF and NSE NMF II, where brokers and MFDs transact in units through the exchange infrastructure.
• MF Utilities (MFU): the industry's shared platform, where an investor with a Common Account Number can transact across fund houses with one form or login.
• Online platforms and apps: distributor platforms that offer regular plans, and execution-only platforms (EOPs) that offer direct plans under SEBI's 2023 framework (Category 1 EOPs are agents of AMCs registered with AMFI; Category 2 EOPs are agents of investors registered as stock brokers).
• Registered investment advisers: recommend direct plans and charge the investor a fee.
• Direct: the AMC's own website, app or branches, and the RTA's portals.

Channel management for an AMC means pricing (commission structures that comply with SEBI's limits), training and compliance (KYD, EUIN, code of conduct), and service levels across these channels.

How distributors are paid

Since October 2018, SEBI permits only the full trail model: no upfront commission on any scheme. Trail commission is a percentage of the investor's average AUM, paid by the AMC out of the scheme's total expense ratio, usually monthly or quarterly, for as long as the money stays invested under that ARN. The trail rate is decided by the AMC within the TER ceiling and varies by scheme category; it is nil on direct plans because the direct plan's TER excludes distribution expenses. SEBI has also allowed an additional expense for inflows from B-30 cities (beyond the top 30) from individual investors, payable as incentive to distributors; this incentive has been modified and kept in abeyance at times, so treat the current status as notified by SEBI.

Transaction charges are a separate, investor-paid amount that a distributor may opt in to receive: ₹150 for a first-time mutual fund investor and ₹100 for an existing investor, on purchases of ₹10,000 or more. The charge is deducted from the investment and paid to the distributor; the balance is invested. For SIPs the charge applies only if the total commitment is ₹10,000 or more, and it is recovered in 3 to 4 instalments. No transaction charge applies to direct plans, to purchases below ₹10,000, to switches, or to transactions through the stock exchange platforms. A distributor opts in or out for all investors, and may choose differently for different product types, but cannot pick and choose by client.

Commission transparency is enforced from both sides. AMCs publish on their websites the commission paid to distributors. The half-yearly CAS sent to investors discloses, in rupees, the commission paid to the distributor on each scheme. The distributor must disclose to the investor the commission (in all forms) receivable for the scheme recommended, as well as for competing schemes of other fund houses. GST on commission is the distributor's liability, charged on a forward-charge basis if the distributor is registered.

Code of conduct and what gets an ARN cancelled

AMFI's code of conduct for intermediaries, enforced through the AMCs, requires a distributor to:

• Put the investor's interest first and recommend schemes that are suitable for the investor's goals, horizon and risk profile.
• Disclose all material information about the scheme, including risks, loads, expenses and lock-ins, and never assure or guarantee returns.
• Not offer any rebate, pass-back or gift out of commission to induce an investment.
• Not churn portfolios to generate commission, and not split a single investment into multiple applications to earn transaction charges.
• Comply with KYC, KYD, EUIN and anti-money-laundering requirements, and maintain confidentiality of investor information.
• Not indulge in unfair competition such as disparaging other fund houses, and not use the AMFI or AMC logos without permission.
• Keep the NISM certificate and ARN current, and report any change in status to AMFI.

The investor may change distributor, or move to direct, at any time without a no-objection certificate from the outgoing distributor, by simply writing to the AMC. When a distributor's ARN is suspended or cancelled, AMCs stop paying trail; on cancellation the assets are treated as direct. A distributor's business, therefore, rests on retained assets and a clean compliance record.