Fund Manager vs Distributor: Who Does What, and Why

A fund manager decides what the scheme holds. A distributor decides nothing about the portfolio and instead brings the scheme to a person, handles the paperwork and stays reachable afterwards. Kalyani Bhagat manages the invented Girnar Large Cap Equity Fund; the distributor who opened a folio in it cannot buy or sell one security inside it.

Here is what that answer rests on, in three parts. A scheme is run by an asset manager under a stated mandateThe written statement of what a scheme may hold and how it will be measured, published before anybody puts money in., and the fund managerThe person employed by the asset manager to decide which securities a scheme holds and in what weights. who takes those decisions is employed by the asset manager rather than by anybody holding units. The value of one unit is struck by the scheme's own machinery each day and applies to every holder alike, so no part of the price is settled on the route the money travelled. And one expense ratio, invented here at 1.65 per cent of assets a year, already contains inside it the part that pays for distribution. One fact reorganises everything that follows: both roles are paid out of the scheme's own charge, and neither of them is engaged by the holder who meets them.

One asset manager and one scheme run through everything below. Girnar Asset Management Limited operates the Girnar Large Cap Equity Fund, an open ended equity scheme with net assets of Rs 4,200 crore and 120.00 crore units outstanding. Divide the first by the second and one unit is worth Rs 35.00 exactly. The scheme is held across 3,80,000 folios, so the average holding works out at about Rs 1,10,526/-. Kalyani Bhagat manages it and Sohail Merchant heads operations at Girnar Asset Management. The distributorA party engaged by an asset manager to bring a scheme to people, complete their transactions and service them afterwards. is a position, not a person, and the position fixes what the work is.

One expense ratio, taken as given rather than rebuilt, splits between two parties, and the two parts pay for unrelated work.

What does a fund manager decide?

Three things, and they are all inside the scheme. Which securities the Girnar Large Cap Equity Fund holds. In what weights it holds them. And when any of that changes. Every one of those decisions is taken inside the mandate the scheme published before the first rupee arrived, and the mandate is the outer wall of the job rather than an instruction from anybody in particular.

Now the part that is easy to miss. The difficulty is position rather than method. Kalyani Bhagat is an employee of Girnar Asset Management Limited. She is accountable to that asset manager, and through it to the trustee companyThe party that holds a scheme in trust for the people who hold its units and stands between them and the asset manager. that stands between the asset manager and the people holding units. She is not accountable to any one of those people individually, and she takes no instruction from any of them about any security. The scheme is one pooled arrangement and not 3,80,000 separate ones. A holder who telephones with a view on a holding is not making a small procedural mistake. There is no channel at all for that instruction to arrive through.

The reach of the job is what makes it different in kind from almost any other job a holder encounters. Every holder in the scheme holds the same portfolio, so one decision by the fund manager lands on all 3,80,000 folios at once, in the same direction, on the same day. A cook in a large canteen decides one menu for everyone eating there that afternoon. Nobody at any table orders separately. The cook is not serving four hundred customers; the cook is making one decision that four hundred people then eat. The shape of one decision serving everyone governs the rest of this comparison.

What does a distributor decide?

A role explained only as the opposite of another role has not actually been explained. Read on as though the fund manager had never been described. A distributor decides three things of its own. Whether to carry a particular scheme at all, out of the many available. How to explain that scheme to the person sitting in front of them, and at what length. And how to look after that person afterwards: which form to get right the first time, which record to chase when it goes wrong, and whether to still be reachable in year nine when something changes at home.

The position again, and it is the part most often guessed wrong. A distributor is engaged by the asset manager, not by the holder. Girnar Asset Management empanels the role, the transaction carries the distributor's identifiers, and the payment for the work comes out of the scheme's own charge rather than out of a bill sent to the person who was served. Being engaged by the asset manager has a consequence worth saying plainly: the distributor is not the holder's agent, and neither role is an adviser. The Securities and Exchange Board of India (SEBI) sets what a distributor may and may not say about a scheme.

The distributor decides nothing whatsoever about what is inside the scheme, and that is the one sentence worth carrying away. Not which securities. Not the weights. Not when any of it changes. A household that has bought a gas connection from the same agency for a decade knows the agency well: it delivers, it fixes the paperwork when a name is spelled wrong, it answers the phone. The agency does not decide what goes in the cylinder, and nobody has ever expected it to. A distributor and a scheme have exactly that shape. The only unfamiliar part is that the thing in the cylinder is a portfolio.

Why do the two roles get confused so easily?

Because of where each one stands, not because anybody is careless. The distributor is the only one of the two a holder ever meets. Somebody sat across a table, explained a scheme, filled in a form correctly, telephoned in March, remembered a daughter's name. The fund manager, meanwhile, is a line of text in a document most holders open once and many never open at all. One role has a face and a mobile number. The other has a signature on a document.

So when a year goes well, the credit goes to the person in the room. When a year goes badly, the blame goes to the same person. Neither is accurate, and the arrangement produces the error all by itself. A household that has dealt with the same person for nine years will naturally treat that person as the one running its money, and nothing in the arrangement ever tells them otherwise.

The human version is worth stating on its own. A holder who makes this mistake has not been foolish. The holder has been handed an arrangement with two visible names in it and no map showing which name does what, and then left to work it out from who answers the phone. The gap is a design problem, not a judgement problem.

Who pays each of them, and out of which part of one ratio?

The same scheme is available in two plans on an identical portfolio, at invented ratios of 0.85 per cent of assets a year and 1.65 per cent of assets a year. Subtract: 1.65 per cent less 0.85 per cent is 0.80 percentage points. The 0.80 percentage point difference is the distribution componentThe part of a scheme's expense ratio that pays for bringing the scheme to a person and servicing them afterwards., and what the 0.85 per cent is doing underneath it is worth slowing down for.

The 0.85 per cent is carried by both plans. The lower ratio covers the running of the scheme: the fund manager and the work of managing the portfolio, along with the other operating roles the scheme pays for. The same 0.85 per cent does not shrink, move or disappear when the distribution component is absent. The 0.80 percentage points sits on top of it, in one plan only, and buys something the fund manager has no part in at all. A holder in the plan without a distribution component is paying the fund manager in full and paying the distributor nothing, and a holder in the plan carrying it is paying both, for two things that have nothing to do with each other.

Put it on an amount so it stops being abstract. Take Rs 1,00,000/- held in the scheme for one year, and hold that amount still for the illustration. At an invented 0.85 per cent of assets a year, the running of the scheme takes Rs 850/- across the year. At an invented 1.65 per cent, Rs 1,650/-. The difference is Rs 800/-, or 0.80 per cent of Rs 1,00,000/-, and that Rs 800/- is the distribution component measured on one holding for one year. Neither figure arrives as a bill. Both run against the scheme's assets.

Two numbers are missing, and naming them stops anybody filling the hole with a plausible one. No commission rate paid to any distributor is stated anywhere, and the Rs 4,200 crore of net assets is not split between the two plans. No rupee total for either component can therefore be computed for the scheme as a whole, and the working below runs in ratios and per rupee held rather than in anybody's receipts. An invented rate would be worse than no rate at all.

What is the replacement test, and what does it prove?

Replacing one of them shows what moves. The replacement test is the fastest available and takes about four seconds. Deciding the portfolio was the whole job, and a different person may decide it differently. Replace the fund manager of the Girnar Large Cap Equity Fund and the portfolio may change. A different portfolio is not a criticism of anybody. Deciding differently is what it means for a decision to belong to a role.

Now replace the distributor. The securities are the same. The weights are the same. The value per unit is struck the same way, on the same day, by the same machinery, and comes out at the same number. The units in the folio are the same units, in the same folio, in the same name. Nothing inside the scheme has moved at all. The one thing that has moved is a record of attributionThe record of which distributor a transaction is credited to, carried on the transaction rather than inside the scheme. sitting on the transaction, along with which plan's ratio applies from there onward if the plan itself changes.

The asymmetry between those two replacements is exactly what it means to say one role sits inside the scheme and the other sits on the route to it. The test runs on any question in doubt. If replacing the party could change what the scheme holds, the question sits in the manager's arena. If it could not, the question sits on the route, and the route never touches the portfolio.

What can a holder reasonably ask each of them for?

Ask the fund manager, through the scheme's published documents rather than through a telephone, what the scheme holds, what it is measured against and what it costs. The three answers exist in writing, are the same for every holder, and are not improved by asking somebody in person. There is no version of them that arrives faster because a particular holder asked.

The distributor is the right party for the things that are actually about the holder: help completing a transaction, help getting a record changed, an explanation in plain words of anything in the paragraph above, and a straight answer about what a form is for. Distributor service is the part of the arrangement most worth using, and it is used least by the holders who need it most, usually because nobody has told them it exists.

Then there is the request neither of them can honour, and it should be said plainly rather than softened: nobody in this arrangement can tell a holder what the scheme will do next. Not the manager, who decides holdings and not outcomes. Not the distributor, who decides no holding at all. A mandate, a portfolio and a distribution arrangement between them contain no machinery for answering that question, and anybody answering it confidently has stepped outside the job they hold.

Which jobs belong to neither of them?

Three of them, and naming them stops a reader assigning every job in sight to the two roles in front of them. The registrar and transfer agentThe party that maintains the register of who holds how many units and processes changes to it. keeps the register of who holds what. A nomination or a bank detail therefore changes there and nowhere else. The custodianThe party that holds a scheme's securities and settles what it trades. holds the scheme's securities, so the fund manager decides a holding without ever holding it. The trustee company stands between Girnar Asset Management and the people holding units. Where units are held in dematerialised form, the holding record sits with a depository, either National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL).

The separation is the point rather than an accident of organisation: a register kept by one party, securities held by a second and decisions taken by a third can each be checked by somebody who did not do them. That is what a holder is actually buying into when they buy a unit, and it is worth more than any single party's competence. Ten shops in one market that all use the same weighing scale have one scale to trust; ten shops that each bring their own and check each other's have something better than trust.

What does the contrast look like on one year of one scheme?

Run both arenas on the same scheme in the same year, using only the figures already fixed above. Take the fund manager's arena first. Over one stated year the Girnar Large Cap Equity Fund returned 13.4 per cent, measured net asset value to net asset value. The figure is a net returnA return computed from values that already carry the scheme's expenses, so no charge is deducted from it afterwards. and must never be written without the word. Its stated benchmark returned 12.1 per cent over the same year. An index is not something anybody holds, and nobody pays anything to hold one. A benchmark index therefore carries no costs at all. The two figures are not on one basis, and the difference between them is not a like for like gap. Putting both sides on one basis is worked separately under reading a return honestly. The only question here is whose arena the figure belongs to. Kalyani Bhagat's decisions produced that 13.4 per cent net across all 3,80,000 folios at once, and no distributor was involved in any part of it.

Now the distributor's arena, same scheme, same year. Rs 1,00,000/- enters the Girnar Large Cap Equity Fund. Dividing Rs 1,00,000/- by a value per unit of Rs 35.00 allots the holder 2,857.143 units at the recorded convention of three decimal places. The value per unit is struck once by the scheme for everybody and is not settled on the route the money took. The same division with the route changed gives the identical figure. The route decides two things and only two. Which plan's expense ratio applies to those units from then on, an invented 0.85 or 1.65 per cent of assets a year. And which distributor the transaction is attributed to, carried on the transaction by a registration number from the Association of Mutual Funds in India (ARN), an employee unique identification number (EUIN) and the distributor code.

Put the two arenas beside each other and the reconciliation is short. The invented 0.85 per cent is carried by both holders and covers the running of the scheme, the fund manager included. The invented 0.80 percentage points is carried by one of them and pays for something the fund manager has no part in. On Rs 1,00,000/- held still for a year, that is Rs 850/- against Rs 1,650/-, a difference of Rs 800/-.

Close by naming the holes rather than filling them. Naming a hole is the difference between an illustration and a claim. No fee schedule for the fund manager is stated, no commission rate for any distributor, and no split of the Rs 4,200 crore of net assets between the two plans. So every figure above is a ratio or a per rupee illustration, and not one of them is anybody's receipt.

Where does the regulated line sit, and who draws it?

Not by the asset manager and not by the distributor. A regulator sets what a distributor may and may not say about a scheme, what registration each of these two roles has to hold, what has to be disclosed to whom and by when, and what the identifiers on a transaction are for, and all of it moves. A registered condition printed anywhere does not become merely dated on the day it changes. The printed version becomes wrong, while still looking authoritative. The bodies that set them are named below, along with where each publishes.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.