Fund Distribution & Channel Management Practices

This is the unit about the work itself: how a scheme gets from an AMC to an investor, who is paid what for making that happen, and the rules around it. Eight per cent of the paper, and the material a practising distributor uses most.

How do mutual funds reach investors?

Through several channels at once. Individual distributors and small firms sell face to face and hold the relationship. Banks distribute to their own customers. National distributors operate at scale across cities. Stock exchange platforms and online portals let an investor transact without anyone in between, and an AMC's own website and offices are a direct channel.

The channels differ in reach and in cost to serve, but the product does not change between them. What changes is whether a distributor is involved, and that single fact is what the next section turns on.

What is the difference between a Direct Plan and a Regular Plan?

Both are the same scheme. The same portfolio, the same fund manager, the same investment objective, the same securities bought on the same day at the same prices. There is only one pool of money.

The difference is that an investment made through a distributor carries a commission, and one made directly does not. That commission is met out of the scheme's expenses, so the Regular Plan carries a higher total expense ratio. A higher expense ratio means a slightly lower NAV over time, which is why the two plans of the same scheme publish different NAVs.

It is worth being exact about who pays. The investor is not billed for commission. It comes out of the scheme's expenses, which is a real cost to the investor but an indirect one — and that is precisely why disclosing it on request is part of the code of conduct.

How is a distributor paid?

Indian mutual fund distribution runs on an all-trail model: commission is paid over the period the money stays invested, rather than as a lump sum at the point of sale. The design intent is plain enough — a distributor earns while the investor remains invested, so the incentive is to place money well and keep it there rather than to move it.

Two rules sit alongside this. Commission may not be rebated to the investor, in cash or in kind, to win the business; and the amount earned must be disclosed to the investor when asked. Both come from AMFI's code of conduct, and both are enforceable against the ARN.

Due diligence, and who it applies to

Larger distributors — the ones operating at scale, across many locations, or with large volumes — are subject to a due-diligence process carried out by the AMCs. It looks at the way the business is run: how customers are advised, how complaints are handled, whether the sales process is documented, and whether the systems can support what is being sold.

The idea is that a distributor's obligations grow with its reach. An individual selling to a hundred families and a national firm selling to a hundred thousand carry the same duty to each investor, but only one of them needs an audited process to make that duty real.

What the examination tends to ask here

About eight questions. The reliable ones are the Direct-versus-Regular distinction — which is asked in many disguises and where the answer is always 'same scheme, different expense ratio' — the all-trail structure of commission, and the specific things the code of conduct forbids, rebating chief among them.