Amfi Code of Ethics Essay Example

and marketing mutual fund schemes adhere to professional, ethical, and effective practices for the overall benefit of investors, intermediaries, and the Mutual Fund Industry.

The Indian mutual fund industry was established in 1964 with the creation of the Unit Trust of India (UTI). In 1987, public sector institutions joined the industry, followed by private sector participants in 1993. Throughout its history, UTI and other mutual funds have heavily relied on intermediaries to promote their schemes to investors. Without intermediaries, the mutual fund industry would not have achieved its current level of popularity and reach among investors.

Intermediaries have played a critical role in popularizing mutual funds in India. They offer clients access to forms, explain different schemes, and provide administrative and paperwork support to investors, making it easy for them to invest. Over time, the nature of intermediation has changed. Initially, individual agents were instrumental in driving growth, but institutional agents, distribution companies, and national brokers have now become active in promoting mutual funds. Moreover, banks, finance companies, secondary market brokers, and even post offices have recently joined in marketing mutual funds to their existing and potential clients. It is evident that all types of intermediaries are necessary for the industry's growth, and their well-being, commitment to quality, and business practices will significantly shape the future evolution of India's mutual fund industry.

The text provides guidelines for selling and marketing mutual funds. It explains that investors can buy and sell mutual fund units through different intermediaries, such as individual agents, distribution companies, brokers, banks, post offices, and Asset Management Companies (AMCs), including the Unit Trust of India. It also classifies mutual fund investors into three categories: those seeking

product information, advice on financial planning, and investment strategies.

The Mutual Fund industry currently offers two levels of services to cater to different types of investors. The first level is for those who require basic service and execution support, including delivering and collecting application forms, cheques, paperwork, and post-sale activities. The second level is for those who prefer to do everything themselves, including choosing investments and handling the process and paperwork related to investments. Additionally, the industry also provides value-added services such as product information and advice on financial planning and investment strategies.

The advice involves analyzing an investor's financial goals based on their investor category, evaluating their resources, determining their risk tolerance/preference, and using this data to suggest an allocation of assets or specific investments that align with the investor's needs. Investors may also receive information on taxation, estate planning, and portfolio rebalancing to stay informed about market changes and adjust their portfolios accordingly. These advisory services focus on establishing a lasting relationship with investors. In India, as mutual funds are relatively new, there is limited awareness among investors about their operation and benefits. Additionally, only a small number of investors approach financial planning in an organized manner.

Therefore, the majority of investors would greatly benefit from the mentioned value-added services. Basic services include providing information on schemes, assisting with application forms, submitting forms and cheques, delivering redemption proceeds, and answering scheme-related queries. Investors here receive convenience and access to mutual funds through brokers and intermediaries who facilitate paperwork. These services are also offered through AMCs' branches and front office staff.

These services are transaction-oriented, meaning that investors make their own investment decisions but rely on the AMC

and intermediary for execution and support. While institutions can still be serviced by AMCs and intermediaries, it is suggested that these entities focus more on individual investors and make every effort to provide them with high-quality advice and product information. They should also work to explain and position this service as a specialized and value-added offering, which may be challenging for clients to achieve independently.

ii. The Mutual Fund industry needs to convince investors that the cost they are paying for transactions and intermediation is justified because they will receive long-term benefits from the counseling and guidance provided. To achieve this, the industry must gather assets from individual investors by offering value-added financial planning services and making Mutual Funds an essential component of their overall portfolio. Only then can Asset Management Companies (AMCs) and intermediaries generate higher margins and levels of profitability, rather than experiencing low margins attributed to basic services alone.

When operating in India, it is crucial for the mutual fund industry to prioritize certain aspects. These include providing every investor, whether institutional or individual, with their desired level of service and appropriate advice based on factual information and figures. Additionally, the intermediation and transaction costs incurred by investors should align with the value of the service and advice received. Finally, it is important to accurately represent and position mutual funds to investors, regardless of the investment channel or method they choose.

The industry should protect the investor's rights, including accurate product descriptions, good service, transparency, and the ability to make informed decisions. Additionally, all individuals involved in selling mutual fund schemes to investors, such as employees of intermediaries, individual agents, and financial planners, should

have a comprehensive knowledge and understanding of mutual funds. The AMFI Certification is a professional qualification that aims to provide intermediaries with a thorough understanding of mutual funds and how to effectively present them to clients. Both individuals and corporate distributors are required to obtain the AMFI certification.

The certification is required for all individuals selling and representing mutual funds to clients, whether they are employees of an intermediary organization or they are an individual financial planner/agent.

Code of Conduct For Intermediaries

Take necessary steps to ensure that the clients' interest is protected. Adhere to SEBI Mutual Fund Regulations and guidelines related to selling, distribution and advertising practices. Be fully conversant with the key provisions of the offer document as well as the operational requirements of various schemes. Provide full and latest information of schemes to investors in the form of offer documents, performance reports, fact sheets, portfolio disclosures and brochures, and recommend schemes appropriate for the client's situation and needs.

To ensure transparency and safeguard investor interests, it is important to highlight the risk factors associated with each investment scheme. It is crucial to provide accurate information and discourage misrepresentation or exaggeration. Investors should be encouraged to review offer documents or key information memorandum before making investment decisions. All relevant details about the schemes or plans should be disclosed while promoting them. Claims or guarantees of returns should only be made if explicitly mentioned in the offer document. Adequate infrastructure should be in place to support asset management companies (AMCs) in maintaining high service standards for investors. Timely processing of forms, cheques, and statement of accounts is essential as per the specified

time frame in the offer document and SEBI Mutual Fund Regulations. Collusion with clients in fraudulent practices such as bouncing cheques or wrongful claiming of dividend or redemption cheques should be avoided. Commission-driven malpractices like recommending unsuitable products solely for higher commissions should also be abstained from.

The text below encourages excessive trading and shifting of mutual fund investments to earn bigger commissions, even if it results in higher costs and taxes for investors. It is advised to avoid making derogatory remarks about any asset management company (AMC) or investment scheme and to only make comparisons with similar and comparable products. It is important to ensure that all legally required communications regarding investors, such as changes in fundamental attributes, fees, exit options, and other significant details, are consistently and promptly sent to investors. The confidentiality of all investor deals and transactions must be upheld.

When promoting different schemes, it is essential to prioritize a client's interests and their financial needs. Recommending a scheme to a client should never be based on the extra commission or incentive earned. Intermediaries will not give back commission to investors and should avoid enticing clients with rebates or gifts. By emphasizing financial planning and advisory services, correct selling is ensured and reduces the occurrence of investors requesting commission returns. All employees involved in sales and marketing must acquire AMFI certification.

Other employees in different functional areas should also be encouraged to obtain the same certification. In the event of a breach of the aforementioned "Code of Conduct" by the intermediary, the following steps will be taken by AMFI:

1. AMFI will write to the intermediary, enclosing copies of the complaint and other
   

documentary evidence, and ask for an explanation within a time limit of 3 weeks. If no explanation is received within the time limit or if the explanation provided is unsatisfactory, AMFI will issue a warning letter, stating that any subsequent violation will result in the cancellation of AMFI Registration.