Most people in India who invest in mutual funds do so through an intermediary. Very often that intermediary is a mutual fund distributor. The word is used loosely, so it helps to know exactly what a distributor is, what the role covers, and how you can check that the person or firm in front of you is registered.
What a distributor is
A mutual fund distributor is a person or firm registered with the Association of Mutual Funds in India (AMFI) to sell mutual fund schemes to investors. Registration gives the distributor an AMFI Registration Number, known as an ARN. Individuals who deal with investors must also pass a certification examination and follow the AMFI Code of Conduct, and the activity sits within the framework that SEBI lays down for mutual funds.
A distributor is empanelled with asset management companies (AMCs), the fund houses that run the schemes. Being empanelled with many AMCs lets a distributor offer schemes from across the industry instead of from a single fund house.
What a distributor does for you
The work falls into four parts.
- Understanding your situation. A distributor should ask about your goals, time horizon, income and existing investments before discussing any scheme, so that what is offered is suitable for you.
- Onboarding. This means helping you complete KYC, open your investment account and set up bank mandates.
- Transactions. A distributor helps you place purchases, start or stop SIPs, switch between schemes and redeem.
- Ongoing service. This covers statements and changes to your details.
Any planning inputs a distributor gives you are incidental to distributing mutual funds. They are part of selling a suitable product, not a separate paid service.
What a distributor is not
A distributor is not a SEBI-registered Investment Adviser. An Investment Adviser is registered under a different set of regulations, charges the client a fee and does not receive commission from fund houses. A distributor works the other way round: the investor is not billed, and the distributor is paid by the AMC.
A distributor is also not a Research Analyst, a Portfolio Manager or a stock broker, unless separately registered as one. If someone presents themselves under one of those descriptions, ask for that specific registration.
A distributor cannot promise returns. Mutual fund returns are not guaranteed, and no registered intermediary is permitted to say otherwise.
How a distributor is paid
Distributors earn commission from AMCs on investments made through them in regular plans. The commission is paid for as long as you remain invested and it comes out of the scheme’s expenses. That is why the regular plan of a scheme has a higher expense ratio than the direct plan of the same scheme.
Because commission rates differ from scheme to scheme, a distributor has a potential conflict of interest. The rules deal with this through disclosure. A distributor must tell you the commission they receive on the schemes they discuss with you, and you are entitled to ask.
How to verify a distributor
Checking takes a few minutes and is worth doing before you hand over documents or money.
- Ask for the ARN. A registered distributor will give it readily, and it normally appears on their website and stationery.
- Go to the AMFI website at amfiindia.com and use its distributor search facility.
- Search by ARN or by name.
- Check that the name shown matches the person or firm you are dealing with, and that the ARN is still within its validity period.
If the name does not match, or the ARN has lapsed, stop and ask why.
A few sensible precautions
- Make payments only to the mutual fund through the official payment route, never to a distributor’s personal account.
- Do not share one-time passwords or sign blank forms.
- Read the scheme documents, and make sure you receive an account statement from the fund house after each transaction.
- If something goes wrong, complain to the distributor first, then to the AMC or AMFI, and then through SEBI’s SCORES portal.
A sound working relationship with a distributor rests on plain disclosure: who they are registered with, what they can and cannot do, and how they are paid. If any of those three is unclear, ask until it is.