Fund Distribution and Channel Management
The most practical chapter for anyone pursuing an ARN. Chapter 6 covers how mutual funds are distributed, the role of MFDs, ARN requirements, commission structures, KYC, and the Direct vs Regular Plan distinction. Expect 6–9 questions in the exam.
Distribution Channels
| Channel | Description |
|---|---|
| MFD (Mutual Fund Distributor) | Individual or firm with ARN; earns trail commission from AMC |
| Banks | Largest distribution channel; operate under ARN; subject to same regulations as MFDs |
| National Distributors | Large firms like NJ Wealth, Prudent; multi-AMC distribution |
| RIAs (Registered Investment Advisers) | Fee-only advisers; cannot earn distributor commission; regulated separately by SEBI |
| Direct Plans | Investor invests directly with AMC; no distributor involved; lower expense ratio |
ARN — AMFI Registration Number
To distribute mutual funds in India, you must hold a valid ARN issued by AMFI. The process:
- Clear NISM Series V-A examination (minimum 50% score)
- Apply for ARN on AMFI website with NISM certificate
- ARN is valid for 3 years and must be renewed
- Renewal requires completing CPE (Continuing Professional Education)
- Sub-brokers must also have an ARN — not just the principal distributor
Commission Structure
Since SEBI abolished upfront commissions in 2018, MFDs earn only trail commission — a percentage of AUM paid monthly by the AMC. This aligns distributor incentives with long-term investor wealth creation.
- Trail commission = % of AUM, paid monthly by AMC from Total Expense Ratio (TER)
- Typically ranges from 0.3% to 1.0% per annum depending on scheme type
- Higher trail in equity funds; lower in liquid/debt funds
- Upfront commissions — abolished by SEBI in September 2018
- Commission must be disclosed to investors in CAS (Consolidated Account Statement)
Direct Plan vs Regular Plan
| Feature | Regular Plan | Direct Plan |
|---|---|---|
| Who invests | Through MFD/bank/distributor | Directly with AMC or online platforms |
| Expense ratio | Higher (includes distributor commission) | Lower (no commission) |
| NAV | Lower (higher expenses deducted) | Higher (lower expenses) |
| Returns over time | Slightly lower | Slightly higher |
Sample Practice Questions
Frequently Asked Questions
What is an ARN and why is it required for mutual fund distribution?
ARN (AMFI Registration Number) is issued by AMFI to qualified distributors after clearing NISM Series V-A. It is mandatory for anyone distributing mutual funds in India.
What is the difference between Regular Plan and Direct Plan?
Regular Plans are distributed through ARN holders and carry distributor commission in the expense ratio. Direct Plans have lower expense ratios and higher NAVs over time.
How many questions from Chapter 6 appear in the NISM V-A exam?
Chapter 6 contributes 6–9 questions. ARN requirements, commission structures, KYC, and distributor obligations are most frequently tested.