Mutual fund distributors play a pivotal role in the Indian financial market, acting as intermediaries between investors and mutual fund houses. These financial professionals are instrumental in guiding investors through the complexities of the mutual fund industry, facilitating transactions, and providing valuable insights into various investment opportunities. Regulated by the Securities and Exchange Board of India (SEBI) and governed by the Association of Mutual Funds in India (AMFI), mutual fund distributors are entrusted with significant responsibilities to ensure investors make informed decisions. In this article, we will delve into the roles and responsibilities of mutual fund distributors, shedding light on their crucial contributions to the investment landscape.
Table of Contents
Defining a Mutual Fund Distributor
- Mutual funds are a popular investment option for diversification and maximising returns.
- Mutual fund distributors, also known as agents, assist investors in purchasing and selling mutual funds in India.
- They are regulated by both the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI).
- Distributors inform investors about the types of mutual funds available and help them make informed investment decisions.
- Mutual fund distributors earn commissions by bringing investors into mutual funds and providing advice on various schemes.
- They assist investors in carrying out investment transactions, including purchases, transfers, and redemptions.
- Mutual fund distributors, registered with SEBI, monitor industry functioning, conduct analysis, and track fund information regularly.
- Collaboration with mutual fund houses allows distributors to identify investment options and create a database with fund recommendations.
Responsibilities of a Mutual Fund Distributor
A good distributor can handle investor concerns and apply the requisite skills. His job is to study an investor’s profile thoroughly, provide them with the best investment advice, and inform them of the relevant schemes. Here are a few of the major responsibilities of a mutual fund agent.
Understanding the Investor’s Portfolio
A mutual fund agent’s primary responsibility is to understand the demands of investors and design an investment plan that suits them. He must understand the investor’s vision of the investments and what he hopes to gain from the plan in order to achieve this.
Educating the Investor
Once they understand the investor’s requirements, they must educate them in order to help them achieve their ideal investment plan. The first step is to scan through different investment options. Thus, evaluating the client’s financial goals is necessary.
Assessing the Risk Tolerance of Investors
Before finalising an investment plan, a distributor should understand the investor’s risk appetite and construct a strategy based on that investor’s risk tolerance level. For example, if an investor wishes to invest in a low-risk plan, then debt must be a more viable option than equity. In order for the distributor to devise an investment strategy, he must consider all the fundamental factors, such as the investor’s financial goals, investment period, family status, expenses, and savings, as well as their current financial situation.
Analysing Investment Options
As soon as the agent understands the investor’s goals, he understands the market conditions. To come up with a strategic plan, he analyses technical charts and financial conditions.
Developing an Investment Strategy
As soon as everything is in order, the agent must construct an investment strategy that combines diversified investment options to minimise investor risks and maximise returns. As part of the agent’s job, the agent must keep track of the investor’s goals, as a changing portfolio may require frequent assessments of the investor’s strategy.
Documentation
The importance of documentation in investing cannot be overstated. All discretionary financial details of the investor are expected to be handled by the agent. Regulatory bodies have made this documentation mandatory when auditing a firm.
Eligibility of a Mutual Fund Distributor
Since mutual fund distributors play a significant role in the mutual fund industry, the criteria to become an agent are uncompromising. AMFI introduced a strict registration procedure, which includes the following requirements:
- The minimum age of the potential distributor must be 18 years old.
- Candidates must have either a class 12 or class 10 diploma with three years of experience.
- Candidates must pass the certification test: NISM Series V-A in order to become an agent. The SEBI has made registration mandatory. After passing the NISM certification test, the candidate will receive an AMFI Registration Number (ARN). By obtaining this Application Reference Number (ARN), the candidate will be eligible to become an AMFI mutual fund agent. Aside from the ARN, candidates will also receive an Employee Unique Identification Number (EUIN).
- From the date of examination, the NISM certification is valid for about three years.
- More than one distributor cannot hold the registration letter or ARN card at any given time.
It is important for registered intermediaries to be aware that they can be de-registered if they commit the following acts:
- If the code of conduct is violated.
- The regulatory authority has indicted an intermediary for serious offences.
- Consumer court upholds gross negligence complaint.
If a senior citizen wishes to become a mutual fund distributor or agent, he must attend the Continuing Professional Education training module or the CPE program. Upon completion of the CPE program, the candidate must complete the documentation process and apply for ARN.
AMFI encourages distributors to promote mutual funds in accordance with best practices and ethical standards. Investors’ best interests must always be at the forefront of their minds, and they must be guided with utmost caution and diligence.
Mutual Fund Distributor Commission
Distributors receive trailing commissions when they source investors outside the top 30 cities. Trailing commissions are categorised as follows:
- T-30 Cities: In the top 30 cities across India, the commission rate is set at a standard rate. There are no additional benefits or bonuses for sourcing clients from these cities. Depending on the fund house and the type of mutual fund, commissions range from 0.1% to 2%.
- B-30 Cities: Cities below 30 are those that don’t fall into the top 30. The distributor will receive an additional incentive if they source clients from B-30 cities. On top of the regular commission, extra incentives can be offered on every investment made during the first year. The distributor earns a special commission on each investment in addition to the standard commission rate of 0.1% to 2%.
Know Your Distributor (KYD) Guidelines
To prevent financial fraud played on investors by mutual fund distributors or their employees, AMFI has initiated specific penal actions. These actions include suspending ARN holders and notifying all AMCs to suspend commissions, trail commissions, and incentives.
AMFI has been instructed to tighten the distributor registration procedure by SEBI (Securities and Exchange Board of India). As a result, mutual fund distributors are required to comply with a more rigorous registration procedure known as Know Your Distributor (KYD). KYD includes obtaining relevant documents and validating them, as well as verifying personal information and using biometrics.
Since 1 September 2010, AMFI has started the KYD process for mutual fund distributors. The KYD (Know Your Distributor) process is very similar to that of KYC (Know Your Customer) for investors. Distribution companies are required to submit identity proofs, address proofs, PANs, and bank account details with evidence. As part of the KYD process, it has also introduced biometrics.
On the AMFI, the KYD form is also available under the ‘Distributor Related Forms’ tab. This tab also contains updated forms for changing address, contact information, bank information, etc.
As part of the KYD process, AMFI has selected CAMS to provide biometric services. The process can be carried out through their CAMS POS centres. This allows for better control over the movement of documents and data. Thus, mutual fund distributors and agents must apply for KYD. Additionally, an ARN registration application must be submitted simultaneously.
Conclusion
In India, mutual fund distributors help investors buy and sell mutual funds. In exchange for bringing investors into mutual funds, they earn commissions. They are regulated by both SEBI and AMFI, the Association of Mutual Funds in India. It is important for a distributor to be able to address investor concerns as well as apply the necessary skills. A financial adviser’s job is to study an investor’s profile thoroughly, provide them with the best investment advice, and inform them of the available schemes. In case you are a beginner, you can seek guidance from Share India.
