Fund Distribution and Channel Management Practices

A scheme is manufactured by an asset management company, but it reaches an investor through somebody: a bank branch, a national distributor, an exchange platform, an individual who has sold to the same forty families for twenty years — or through nobody at all. This unit is about that last stretch. Who the channels are, what changes when a distributor stands in the middle and what does not, how that distributor is paid and out of whose money, and the conduct rules that follow from being paid by the fund while sitting beside the investor. For anyone doing the job, it is the unit that describes the job. It starts with the channels themselves.

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

Questions on this unit turn on distinctions that look like differences in product but are not. The Direct and the Regular Plan of a scheme are one portfolio with two expense ratios; a candidate who reads them as two schemes with two portfolios will answer the NAV comparison the wrong way round. The question of who pays commission is a favourite trap, because both halves of the answer are needed — the investor is never billed for it, and the investor nonetheless bears it, indirectly, through the scheme's expenses. The all-trail structure invites questions about what a distributor earns when money stays invested against what is earned by moving it. On conduct, the line to hold is that rebating is prohibited outright while disclosure of commission on request is required, and the two are easy to reverse under time pressure. Due diligence rewards precise reading: it is carried out by the AMCs, it attaches to larger distributors rather than to everyone holding an ARN, and it examines how the business is run rather than how much it sells. The channel material is mostly a matter of telling the channels apart, with one recurring confusion worth pre-empting — buying through an exchange platform or an online portal is still a transaction that may be in either plan, so a screen with no person on the other side is not by itself a Direct Plan.