Mutual Fund Products for the New Cadre of Distributors

1Who the new cadre is

SEBI created the new cadre of mutual fund distributors in September 2012 to take simple mutual fund products to more investors, especially beyond the big cities. People in this cadre include:

• postal agents;
• retired government and semi-government officials (class III and above, or equivalent) with at least 10 years of service;
• retired teachers and retired bank officers with at least 10 years of service;
• other similar persons, such as bank correspondents, as notified by AMFI or AMCs.

They qualify by passing the simpler NISM Series V-B: Mutual Fund Foundation examination and registering with AMFI. Their ARN comes from a separate series that starts with "SD".

Remember

• New cadre: postal agents, retired officials, teachers and bank officers (10+ years), bank correspondents.
• Qualification: NISM V-B + AMFI registration ("SD" series ARN).

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2Simple and performing schemes

A new-cadre distributor may sell only simple and performing schemes. SEBI defines them as:

• diversified equity schemes, fixed maturity plans (FMPs) and index schemes,
• whose returns are equal to or better than their scheme benchmark returns in each of the last three years.

Both conditions must hold. The scheme must be one of the three simple types, and it must have performed: matched or beaten its own benchmark in every one of the last three years, not just on average.

AMCs publish the list of their schemes that currently qualify, and the list changes as performance changes. A scheme can drop off the list after a weak year, and at times an AMC may have no qualifying schemes. Always check the AMC's current list before recommending a scheme.

Example A flexi cap fund beat its benchmark in two of the last three years and trailed it in the third. Its three-year average is above the benchmark, but it is not "performing" under the rule, so a new-cadre distributor cannot sell it.

Exam trap The test is "each of the last three years", not "on average" and not "since launch".

Remember

• Simple = diversified equity, FMP or index scheme.
• Performing = returns ≥ benchmark in each of the last 3 years.
• Check the AMC's current eligible list; it changes.

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3Diversified equity schemes

A diversified equity scheme spreads its money across many companies and sectors instead of concentrating on one sector or theme. Under SEBI's scheme categories, typical diversified categories are large cap (at least 80% in the top 100 companies), large and mid cap, multi cap, flexi cap, mid cap, small cap and ELSS. Sectoral and thematic funds (at least 80% in one sector or theme) are concentrated, not diversified.

Points to explain to investors:

• Equity returns are not guaranteed and can be negative in the short term; these schemes suit goals that are at least five years away.
• Diversification reduces company-specific risk but not market risk.
• Large-cap schemes are usually less volatile than mid- and small-cap schemes.
• ELSS gives a Section 80C deduction (old tax regime) with a three-year lock-in.
• A SIP spreads purchases over time and averages the cost.

Remember

• Diversified = many companies and sectors; sectoral/thematic is not diversified.
• Equity = long-term money (5+ years), returns not guaranteed.

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4Index schemes

An index scheme (index fund) is a passive scheme that copies an index such as the Nifty 50 or the Sensex. It holds the same stocks in the same proportion (at least 95% of its assets in the index constituents) and aims to give the index return, not to beat it.

• Lower costs: no stock-picking team is needed, so the total expense ratio is usually lower than for active schemes.
• Tracking error measures how closely the scheme follows its index. Lower is better. It arises from expenses, cash held for redemptions, and timing differences in buying and selling.
• Exchange-traded funds (ETFs) are also passive but trade on the stock exchange like shares. An index fund is bought and sold with the AMC at the day's NAV.

Example Over a year, the Nifty 50 Total Return Index returns 12.0% and a Nifty 50 index fund returns 11.8%. The 0.2% gap is mainly the fund's expenses. Small and steady gaps signal a well-run index fund.

Remember

• Index fund aims to match the index, not beat it.
• Judge an index fund by low cost and low tracking error.

Practise this concept (6 questions)

5Fixed maturity plans

A fixed maturity plan (FMP) is a close-ended debt scheme with a fixed maturity date, for example three years. It invests in debt securities that mature on or before the scheme's maturity date, so the bonds are usually held until they mature.

• Because bonds are held to maturity, interest rate changes during the term matter little if the investor also stays to the end. The likely return is fairly visible at the start.
• FMPs are not guaranteed. They carry credit risk: if an issuer defaults, the return falls. SEBI does not allow schemes to promise or indicate returns.
• Units can be bought only during the NFO. FMPs are listed on a stock exchange so investors can exit before maturity, but trading is thin and units may sell at a discount to NAV. There is no redemption with the AMC before maturity.
• They suit investors with money for a known period who can stay until maturity.

Exam trap An FMP is close-ended: investors cannot buy after the NFO, and they cannot redeem with the fund before maturity. They can only sell on the exchange.

Remember

• FMP = close-ended debt, held to maturity, listed, NFO-only purchase.
• Low interest rate risk if held to the end; credit risk remains; no guaranteed return.

Practise this concept (6 questions)

6Staying within the licence

A new-cadre distributor must not sell schemes outside the simple and performing list, for example sectoral or thematic funds, open-ended debt schemes, hybrid schemes, or any scheme that fails the three-year performance test. If an investor wants such a scheme, refer them to a regular distributor (NISM V-A) or let them invest directly.

Good practice when recommending a simple product:

• Understand the investor's goal, time horizon and risk appetite first.
• Match the product to the horizon: FMP for money needed on a known date, with no need to exit early; index or diversified equity for long-term growth.
• Explain risks honestly: past performance does not guarantee future returns.
• Keep to the AMFI code of conduct: no misleading claims, no promised returns, and disclose your commission.

Remember

• Outside the eligible list = not allowed, however good the scheme.
• Match product to goal and time horizon; never promise returns.

Practise this concept (4 questions)