Fund Distribution & Sales Practices

Fund Distribution & Sales Practices

Investor Community

Institution al Investors

Individual Investors

HNIs

Retail

Who can invest in Mutual Funds in India?  Residents :

 Resident Individuals  Indian Companies  Indian Trusts/ Charitable Institutions  Banks / NBFCs  Insurance Companies  Provident funds

Who can invest in Mutual Funds in India?  Non Residents :  NRIs  OCBs  Foreign Entities:  FIIs registered with SEBI

Role of the Distribution Channels “MFs are primarily vehicles for large collective investments , based on the principle of pooling the funds from a large number of investors” Hence, “Majority of schemes are targeted at the retail level, from where a substantial portion of investment takes place” So, “Distribution network becomes critical

Types of Distribution Channels: 1.Individual Agents 2. Distribution Companies 3. Banks / NBFCs 4. Direct Marketing ( By the Sales Officers of AMCs) 5.Current Distribution patterns - Non UTI funds rely on the 2&3 above.

Sales Practices in MF Market

Agents’ Commission

• Commission can be paid upfront or trail commission. • Market Practice:

1 - 1.5% (Equity funds)

0.6-0.8% (Debt Funds) • Higher commission paid for Tax-benefit schemes as there is a lock-in period.

Agents’ Commission •The initial issue expense cap of 6% includes brokerage as well. •All SEBI regulated open ended funds are authorized to charge exit /entry loads to cover the funds’ distribution expenses. • A no load fund includes these expenses as a part of the regular management & marketing expenses. • SEBI prescribes a cap on all the total

Effective Selling of MF Schemes

• Know the important characteristics of the scheme. • Know your client profile (age, risk tolerance,income levels) • Understand clients’ needs (investment objective, return expectation, cash flow requirement) • Assistance in making the right choice of investment

SEBI's Advertising Code • The code protects from misleading investors. • Past performance is not a guarantee • Dividends declared/paid shall be mentioned in Rs.per unit • Only compound and annualized yield can be advertised for schemes for more than one year. • Annualised yield must be shown for at least one, three fine and since launch. • For less than one year performance may be shown in terms of total returns should not be annualized. •

Appropriate benchmark should be chosen. And once chosen it should be consistent.

Appointment of AGENTS The key terms of agreement are as follows: • The agent will provide a copy of the abridged OD to the customer and will make available for inspection a copy of the OD and sell at price currently in effect. • The agent will execute all the transactions on behalf of the customer who will not have any recourse to the agent in case of an error(s) / problems /quality of investment. • The agent must make the customer know that the funds’ units are not endorsed by him and do not constitute his obligation. •Agent responsible at his expense to ensure compliance with applicable regulation in each jurisdiction.

Key terms of Agreement………….2 • The agent will offer/sell/purchase unit at the current public offering price. • All orders become effective only upon acceptance and confirmation by the fund. • The agent is responsible to ensure compliance with the applicable regulations in each transaction he deals in and the fund is not responsible for any breach by agent in this regard.

AMFI code of Ethics AMFI has recommended a code of practices with respect to overall fund operation including distribution and selling. 1. Management of fund should be in the interest of unit holders. 2. High standards of service are expected from funds 3. Adequate disclosure standards 4. Professional Selling practices. 5. Fund Management in accordance to stated investment objective.

Fund broking practices in US • Cap on sales/distribution expenses. • Broker is not allowed to describe a fund as no load fund if it has front-end or default load. • Broker prohibited from recommending that purchase of units before ex-dividend may be advantageous. • Prohibited from using commission as a basis for recommending a fund. • Preferred pricing to specific investors prohibited.