Cooling off period
The 12 months after an investor-initiated change of distributor code in a folio, during which no trail is paid to either distributor; only afterwards may the AMC consider paying the new one.
In plain language
A mutual fund investor can change distributors whenever they like, without specifying any reason — or drop the distributor altogether and go direct.
That freedom creates a temptation: a distributor might induce or force someone else's clients to switch their folios to his code and collect the trail. The industry's answer is to take the money out of it. In case of a change of distributor code in a folio, no commission would be payable to any distributor, neither the old one nor the new one.
Then the door reopens, slowly. The AMCs may consider making payment of trail commission to the transferee distributor after a cooling off period of twelve (12) months from the date of change of distributor code in the Unitholder database.
How it works
The investor-initiated change (Chapter 6.10).
- The investor makes a written request to change distributor, or to go direct.
- The AMC must comply without insisting on a No Objection Certificate from the existing distributor.
- From the change, neither the old nor the new distributor is paid.
- After 12 months from the date the code changed in the unit-holder database, the AMC may consider paying trail to the new distributor.
The workbook says the arrangement ensures two things at once: the investor keeps the right to change, and a distributor is discouraged from luring a client to change the code.
The exception — voluntary cessation. If the investor changes code because the old distributor has voluntarily ceased business, the investor should not be left in the lurch, so the new distributor gets trail as per SEBI or AMFI guidelines — without the cooling off.
Distributor-initiated changes are a separate route, allowed only for:
- a change in the distributor's name or legal status (individual to partnership, partnership to LLP, private to public company or vice versa);
- merger, acquisition, consolidation, transfer of business or new code within the same group (non-individuals);
- transfer of AUM within the same family or close relatives (individuals);
- transfer of business by individual distributors.
In these cases the entire AUM must move, only to a valid, KYD-compliant ARN holder, and the old ARN is surrendered.
A worked example
Mrs Fernandes in Panaji holds Rs 8,00,000 in a regular plan through distributor A. Distributor B persuades her to move the folio to his code. Trail is 0.75 percent a year (illustrative).
Annual trail on Rs 8 lakh = 8,00,000 × 0.75% = Rs 6,000
Daily trail = 6,000 ÷ 365 = Rs 16.44
Day of change (say 1 July). She submits a written request. The AMC changes the code without asking A for an NOC. From that day neither A nor B earns the Rs 16.44 — about Rs 6,000 of trail over the year goes to nobody, at constant value.
1 July next year. The 12-month cooling off period ends. The AMC may consider paying trail to B from here — it is not an entitlement.
A different story. Suppose A had instead voluntarily ceased business and Mrs Fernandes moved to B for that reason. Then B would receive trail as per the SEBI/AMFI guidelines, with no year of nothing.
And a third. If A were simply converting his proprietorship into a partnership firm, he could initiate the change himself — but only by moving his entire AUM to the new, KYD-compliant ARN and surrendering the old one.
Why NISM asks about it
Chapter 6.10 (Change of distributor) is where the cooling off period is taught. Expect the number — twelve months — and the rule that during a change no commission is payable to either distributor. The companion facts are also examinable: no NOC from the old distributor, the voluntary cessation exception, and the four situations in which a distributor may initiate a code change.
Common exam traps
- Twelve months, from the date the code changed in the unit-holder database — not from the investor's request or the original investment.
- During the change, neither the old nor the new distributor is paid.
- After 12 months the AMC may consider paying — the workbook does not make it automatic.
- No NOC from the existing distributor is required.
- Voluntary cessation by the old distributor is the exception — the new distributor is paid per the guidelines.
- Distributor-initiated transfers need the entire AUM to move to a valid, KYD-compliant ARN, with the old ARN surrendered.
Where this is taught
Free preparation for NISM Series V-ARelated terms
- Direct and regular plansThe two routes into the same mutual fund scheme: a direct plan with no distributor and a lower expense ratio, and a regular plan that pays distributor commission — same portfolio, separate NAVs.
- AMFI Registration NumberThe registration number AMFI allots to a mutual fund distributor after NISM certification and KYD. It must be quoted on a client's Regular Plan transaction for commission to be paid.
- Full trail modelSEBI's rule that AMCs pay distributors only trail commission in all schemes — no upfront commission and no upfronting of trail, in cash or kind, through sponsorships or any other route.
- Trail commissionThe commission an AMC pays a mutual fund distributor as a percentage of the current value of the investments they brought in, calculated daily and paid for as long as the investor stays invested.
- Know Your DistributorAMFI's verification process for mutual fund distributors — document verification plus a biometric impression of the right index finger, traditionally at a CAMS Point of Service — completed before ARN registration.