Distribution, scheme evaluation and suitability
ARN, EUIN, trail commission, the AMFI code, risk-adjusted return measures and how to judge whether an SIF suits…
Passing the exam makes you eligible to sell; it does not make you a distributor. This chapter covers the registration machinery, how you are paid, how to compare schemes with numbers rather than adjectives, and the suitability duty that gets heavier when the product can go short.
Becoming and staying a distributor
A distributor needs three things: a valid NISM certificate, an ARN (AMFI Registration Number) from AMFI, and a KYD (Know Your Distributor) record with PAN and Aadhaar. There is no minimum educational qualification; the applicant must be at least 18. Firms obtain a corporate ARN, and every employee or relationship manager who interacts with investors must hold an EUIN (Employee Unique Identification Number), which is recorded on each application. If the EUIN is missing, the AMC seeks it within a remediation period or treats the transaction as execution-only for commission purposes.
The ARN is valid for three years and is renewed with a valid NISM certificate, obtained either by re-taking the exam or by completing a Continuing Professional Education (CPE) programme before expiry. The AMFI Code of Conduct binds every ARN holder: no rebating of commission, no assured returns, no splitting applications to earn more, fair disclosure of commission, and no misuse of client information.
How distributors are paid
Since October 2018 SEBI permits only trail commission, paid from the scheme's expense ratio as a percentage of the assets each investor keeps invested. Upfront commission paid by the AMC is prohibited. The Regular Plan TER includes the commission; the Direct Plan does not, which is why its NAV is higher. A distributor must disclose to the investor the commission earned on the recommended scheme and on competing schemes of the same category. SIF strategies follow the same trail-only model.
Evaluating a scheme with numbers
Return alone tells you little; a fund that doubled with triple the volatility may have been a bad bet. Learn the standard measures.
Return
For periods up to one year, use absolute return. Beyond one year use CAGR, the annualised compound rate. For a stream of SIP instalments use XIRR, which weights every cash flow by its date.
Risk
Standard deviation measures total volatility of returns. Beta measures sensitivity to the market: a beta of 1.2 means the fund tends to move 20% more than its benchmark. Beta captures only market risk; standard deviation captures everything.
Risk-adjusted return
| Fund annual return | 14% |
| Risk-free rate (91-day T-bill) | 6% |
| Standard deviation | 16% |
| Beta | 1.25 |
| Benchmark return | 12% |
| Sharpe = (14 − 6) ÷ 16 | 0.50 |
| Treynor = (14 − 6) ÷ 1.25 | 6.40 |
| Expected return per CAPM = 6 + 1.25 × (12 − 6) | 13.5% |
| Alpha = 14 − 13.5 | +0.5% |
Higher Sharpe or Treynor is better. Use Sharpe to compare funds that make up a whole portfolio (total risk matters) and Treynor when the fund is one piece of a diversified portfolio (only market risk matters). For index funds and ETFs, the key measure is tracking error, the standard deviation of the gap between fund and index returns; lower is better. Also check expense ratio, AUM, portfolio turnover, fund manager tenure, and the scheme's performance against its own category, not against unrelated funds.
Know your client: KYC and risk profiling
Every investor must be KYC-compliant through a KRA or CKYC before the first investment, with PAN as the identifier (or PEKRN for small investments by PAN-exempt investors). FATCA and CRS declarations are mandatory. Beyond paperwork, the distributor should build a risk profile: the client's financial goals, time horizon, income stability, existing assets and liabilities, and reaction to loss. Risk appetite (willingness) and risk capacity (ability) are different; a client who enjoys volatility but needs the money in two years has low capacity.
Suitability of an SIF
An SIF can be suitable only when four things line up:
- Size. The client can commit ₹10 lakh to one AMC's SIF without it being a disproportionate share of liquid net worth.
- Horizon and liquidity. The client can live with a notice period of up to 15 working days, or with a close-ended or interval structure.
- Understanding. The client grasps that a long-short strategy can lose money on both legs, that derivative shorts carry margin and roll costs, and that a risk-band of 4 or 5 means large drawdowns are possible.
- Fit. The strategy's category matches a real need, for example a Debt Long-Short strategy for an investor who wants bond exposure with some protection against rising yields.
Document the recommendation, the risk-band shown to the client, and the scenario analysis from the strategy document. Never present a long-short strategy as "market neutral" or "capital protected"; neither claim is permitted. And remember that for tax the SIF follows the mutual fund rules for its asset class: equity-oriented strategies get 20% short-term and 12.5% long-term treatment above ₹1.25 lakh, while debt-oriented strategies are taxed at slab.
Remember
- Distributor stack: valid NISM certificate, ARN from AMFI, KYD with PAN and Aadhaar, EUIN for every person who faces investors. No minimum education; 18+.
- Trail commission only since October 2018, paid from the scheme TER; no upfront; commission on the recommended and competing schemes must be disclosed.
- Sharpe = (R − Rf) ÷ SD uses total risk; Treynor = (R − Rf) ÷ beta uses market risk; alpha is return above the CAPM expectation.
- Tracking error is the key measure for index funds and ETFs; lower is better.
- Risk appetite is willingness, risk capacity is ability; a suitability call must weigh both, plus horizon and liquidity.
- An SIF is suitable only if the client can commit ₹10 lakh, accept the notice period, and understand short exposure and the risk-band.