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With hundreds of plans in different categories, choosing a mutual fund might be perplexing. Investors may know that they want to invest but still struggle to comprehend which scheme would suit their goals, risk appetite, and investment horizon.
This is where a mutual fund distributor (MFD) can step in. An MFD functions as a bridge between the investor and the mutual fund firms for scheme selection, transaction of investments, and continuous servicing. The distributors mainly assist in investing in regular plans, for which they earn trail commission from the asset management companies (AMCs).
Read on to understand the role, responsibilities, and importance of a mutual fund distributor.
Key Takeaways
- MFDs aid investors in selecting and investing in appropriate mutual fund schemes.
- They help with purchases, SIPs, redemptions, switches, and other transactions.
- MFDs need to have a valid AMFI Registration Number (ARN) to participate in distribution activities.
- MFDs mostly sell regular plans, which are more expensive than direct plans.
- The job is different from that of a SEBI-licensed investment adviser.
What is a Mutual Fund Distributor?
A mutual fund distributor is an AMFI-registered intermediary that facilitates investments in mutual fund schemes. MFDs act as the middlemen between investors and asset management companies.
A distributor can aid an investor in understanding different mutual fund categories, comparing schemes, completing investment paperwork, and managing transactions, including buy, redemption, and switch.
MFDs can be either individuals or non-individual entities such as banks, broking firms, and online distribution platforms.
They play a very beneficial role for investors who prefer assistance rather than choosing and managing mutual funds on their own.
What Does a Mutual Fund Distributor Do?
The job of an MFD is not just to handle an investment application.
1. Helps Investors Understand Mutual Funds
MFDs explain the various categories of mutual funds, features of schemes, risks, and investment objectives involved. Such services can assist investors in knowing their options before investing.
2. Assists With Scheme Selection
A distributor may help investors shortlist schemes based on factors such as:
- Investment objective
- Risk appetite
- Investment horizon
- Financial goals
- Preferred asset category
Note: This assistance is based on the preferences an investor discloses to the distributor and does not amount to investment advice as defined under SEBI's Investment Adviser Regulations. The distributor's role is focused on mutual fund distribution and suitability rather than providing comprehensive financial planning across all asset classes.
3. Facilitates Transactions
MFDs can help investors with a range of mutual fund transactions, including:
- Purchases
- SIP registrations
- Redemptions
- Switches
- Additional investments
- Other servicing requirements
This might be especially helpful for investors who are not as comfortable managing investment processes on their own.
4. Provides Ongoing Support
After the investment, distributors can aid the investors with queries, account-associated requirements, and transaction-related difficulties.
How Does a Mutual Fund Distributor Earn?
MFDs typically get trail commissions from AMCs on investments mobilized through regular plans. The commission is calculated according to the current structure and the distributor’s agreement with the AMC.
Current full-trail model AMCs pay a trail commission, as opposed to an upfront commission.
The commission is not usually paid by the investor as a separate bill.
This commission is built into the expense ratio of the Regular Plan rather than charged separately, which means it is deducted from the scheme's returns over time. This is a key reason that Regular Plans typically show a higher expense ratio than the equivalent Direct Plan.
Investors should know the difference in the expense ratio of regular and direct plans before making their investment decision.
Mutual Fund Distributor and Regular Plan
The mutual fund distributors will mostly be linked with regular plans.
In a regular plan, there is a distributor or an intermediary involved in the investment process. The scheme expenses include costs relating to distribution. This indicates that the scheme has a greater expense ratio than the similar direct plan.
For instance, an investor looking for assistance in choosing and managing mutual fund investments may choose a regular plan through an MFD. The direct plan is a good option for those who want to do their own research and manage their investments.
Both plans invest in the same underlying scheme portfolio and are managed by the same fund manager. The fundamental difference lies in the setup of the distribution and the corresponding cost structure.
Direct Plan vs Regular Plan
| Feature | Direct Plan | Regular Plan |
| Distributor involved | No | Yes |
| Expense ratio | Generally lower | Generally higher |
| Distribution commission | Not included | Included through the applicable expense structure |
| Investor support | The investor manages independently. | Distributors can assist |
| Suitable for | DIY investors | Investors seeking distribution support |
Direct planning is not necessarily best for everyone. Someone who is not very knowledgeable about investing could appreciate the help they get from a distributor, but a savvy investor might choose to take care of their investments themselves.
Who Can Become a Mutual Fund Distributor?
The individual seeking to become an MFD must fulfill the required certification and registration criteria.
The traditional route includes:
- Meeting the prescribed eligibility requirements.
- Passing the relevant NISM certification examination.
- Obtaining an AMFI Registration Number (ARN).
- Getting empanelled with the relevant AMCs before distributing their schemes.
The core requirement is the NISM Series V-A: Mutual Fund Distributors Certification Examination, conducted by the National Institute of Securities Markets. Once this is cleared, the candidate can apply to AMFI for an ARN, which is valid for three years and needs to be renewed through a further exam attempt or a Continuing Professional Education (CPE) programme.
AMFI says, just having an ARN and being registered with AMFI doesn’t mean a distributor can sell off all mutual fund schemes. The distributor should also be duly empanelled with the concerned AMC.
What is ARN and Why is it Important?
ARN means AMFI Registration Number. It identifies a distributor of mutual funds eligible under AMFI registration.
Distributors are required to have a valid ARN before effecting qualified Regular Plan transactions and for receiving commission. Where applicable, the salespersons operating under a distributor may also need an Employee Unique Identification Number (EUIN).
Investors may verify the registration details of the distributor before choosing their services. This can be done through AMFI's "Locate a Mutual Fund Distributor" tool on the AMFI website ([[LINK:index]]amfiindia.com/locate-distributor), which shows the distributor's registered name, ARN validity, and current status.
Benefits of Using a Mutual Fund Distributor
- Professional Assistance
For new investors in mutual funds, there is help available to comprehend the schemes and their features. - Easier Investment Process
Distributors can assist with documentation, applications, and transactions, making the process more convenient. - Ongoing Support
An MFD can assist investors with queries and transactions regarding the services after the first deposit. - Guidance During Market Volatility
When markets are down, investors can get nervous. A distributor may help investors understand market movements and their available transaction options, and stay disciplined during volatile periods. - Access to Multiple AMCs
An MFD can partner with more than one AMC and sell qualifying schemes of various fund companies.
Limitations of Using a Mutual Fund Distributor
There are a few things to consider when using an MFD too.
- Higher Cost Than Direct Plans
Distributor commissions are not present in Direct Plans. Regular plans generally have greater charges as they incorporate distribution costs. - Distributor Incentives
Investors need to know how the distributor is paid, as MFDs earn commission from AMCs for investments made in the Regular Plans. - Limited Scope of Advice
Do not mix the role of an MFD with that of a SEBI-licensed investment adviser. A distributor is primarily a fund distributor, whereas an investment adviser is an advisor, subject to a different regulatory regime. - Quality Can Vary
The service and knowledge level can vary from distributor to distributor. Investors should therefore evaluate registration, experience, quality of service, and comprehension of their financial goals before choosing one.
Mutual Fund Distributor vs Investment Adviser
(client: The comparison table should explicitly mention the fiduciary obligation and fee-based model applicable to SEBI-registered investment advisers to make the distinction clearer and better satisfy comparison-search intent.
Although both may help investors with investment decisions, their roles are different.
| Basis | Mutual Fund Distributor | Investment Adviser |
| Primary role | Distributes mutual fund schemes | Provides investment advice |
| Products | Mainly mutual funds | Can advise across eligible investment products |
| Compensation | Primarily trail commission from AMCs | Advisory fees |
| Plan association | Regular Plans | Typically advises investors using Direct Plans |
| Registration | AMFI ARN framework | SEBI-registered Investment Adviser |
| Obligation to client | No fiduciary duty; suitability-based distribution | Fiduciary duty to act in the client's best interest, under a fee-based model, without earning product commissions |
They are not the same two roles. Investors need to decide whether they need aid with mutual fund distribution or broader, fee-based investing advice.
How to Choose a Mutual Fund Distributor
Choosing the Right Distributor
Choosing the right distributor can make the investment experience smoother. Before selecting one, consider:
Check Registration
Verify that the distributor has a valid ARN and, where relevant, that the salesperson has a valid EUIN.
Understand the Compensation
Ask how the distributor is compensated and understand the cost implications of investing through a regular plan.
Assess Experience
Look for a distributor who understands different mutual fund categories and can explain risks clearly.
Consider Your Goals
A good distributor should understand your financial objectives, risk tolerance, and investment horizon before discussing suitable schemes.
Evaluate Service
Consider how easily the distributor responds to queries and handles transactions or service requests.
Conclusion
A Mutual Fund Distributor (MFD) is an intermediary between the investor and the mutual fund house, who helps the investor select the right scheme, execute the transaction, and provide after-investment services. Regular Plans are primarily sold by MFDs, and AMCs pay trail commissions to MFDs.
Investors must be aware of the pricing difference between regular and direct plans. Some people need a bit of hand-holding, so they may prefer an MFD. Others may be seasoned investors and would like to manage their investments on their own.
