Lesson 6 of 8 · How Mutual Funds Are Distributed

Due Diligence of Large Distributors by Fund Houses

SEBI requires fund houses to carry out due diligence on their larger distributors. This lesson explains who carries the duty, the four size tests that bring a distributor within it, what the review looks at, and what it does not cover.

Fact-checked 8 October 20263 practice questions in the game

Whose duty it is

Fund houses do not simply pay whoever sells their schemes. SEBI places a duty on each asset management company to carry out due diligence on the larger distributors that sell its schemes, both when a distributor is empanelled and afterwards.

The duty sits with the fund houses whose schemes the distributor sells. Investors, custodians and stock exchanges have no such role.

The four size tests

A distributor is covered if it meets any one of four tests. The first two are measured across the whole industry: non-institutional client assets above ₹100 crore, or commission above ₹1 crore a year. The third looks at one relationship: commission of more than ₹50 lakh a year from a single fund house. The fourth is reach: a presence in more than 20 locations.

Any one test is enough. Each is a threshold to be exceeded, so a distributor exactly at a figure is not covered by that test. Years in business, staff numbers and the number of schemes offered are not tests.

What the review looks at, and what it is not

The aim is for the fund house to satisfy itself about the distributor's internal controls and compliance, and that the distributor is fit and proper to sell its schemes. The review covers the distributor's business model, any penalties and litigation, its associates, and whether the assessment of an investor's risk profile is kept separate from selling.

Smaller distributors fall outside this process but remain bound by AMFI's code of conduct, and breaches of the code can still lead to suspension or cancellation of the ARN.

Due diligence is a check on the distributor's conduct and systems. It does not measure investors' returns, choose schemes for anyone or set commission rates, and it is no assurance about any scheme.

Rules at a glance

Who carries out due diligenceEach asset management company, on its larger distributors, at empanelment and afterwardsSEBI Master Circular for Mutual Funds, 20 March 2026, paragraph 16.6.1

Test 1: client assetsNon-institutional client assets above ₹100 crore across the industryParagraph 16.6.1

Test 2: total commissionCommission above ₹1 crore a year across the industryParagraph 16.6.1

Test 3: commission from one fund houseMore than ₹50 lakh a year from a single mutual fundParagraph 16.6.1

Test 4: reachPresence in more than 20 locationsParagraph 16.6.1

Scope of the reviewBusiness model, penalties and litigation, associates, and separation of risk-profiling from salesParagraph 16.6.1

Worked example

Four distributors against the four tests (illustrative)

Distributor A: client assets ₹120 crore. Test 1 is met (above ₹100 crore), so A is covered, whatever its other figures.
Distributor B: client assets ₹80 crore; commission ₹60 lakh a year across the industry, of which ₹55 lakh comes from one fund house; 5 locations. Tests 1, 2 and 4 are not met, but test 3 is (more than ₹50 lakh from a single fund house), so B is covered.
Distributor C: client assets ₹40 crore; commission ₹30 lakh a year, at most ₹12 lakh from any one fund house; 25 locations. Only test 4 is met (more than 20 locations), so C is covered.
Distributor D: client assets ₹90 crore; commission ₹95 lakh a year, at most ₹45 lakh from any one fund house; 20 locations. No test is met: 20 locations is not more than 20. D is not covered.

Result. A, B and C each meet one test and come within due diligence by fund houses. D meets none and does not, though it remains bound by AMFI's code of conduct.

Key points

SEBI requires fund houses to carry out due diligence on their larger distributors, at empanelment and afterwards.
A distributor is covered if it meets any one of four size tests.
The tests: client assets above ₹100 crore, commission above ₹1 crore a year, more than ₹50 lakh a year from one fund house, or more than 20 locations.
The review looks at the distributor's internal controls and compliance.
Smaller distributors remain bound by AMFI's code of conduct; due diligence is not an assurance about any scheme's returns.

Common misunderstandings

A distributor does not have to meet all four tests: meeting any one brings it within due diligence.
Due diligence is not carried out by investors, custodians or stock exchanges: SEBI places the duty on the fund houses whose schemes the distributor sells.
Due diligence is not a rating of schemes or of returns: it reviews the distributor's internal controls and compliance.

Questions people ask

Is due diligence done only once, when a distributor is first taken on?

No. It is carried out when a distributor is empanelled and afterwards.

Are small distributors unregulated because they fall outside these tests?

No. Every distributor holds an ARN and is bound by AMFI's code of conduct, whatever its size.

Does a distributor that has passed due diligence sell better schemes?

The review says nothing about schemes. It looks at how the distributor is run, and is not an assurance about any scheme's returns.

What this lesson relies on

SEBI Master Circular for Mutual Funds, 20 March 2026 (paragraph 16.6.1, due diligence of distributors)
AMFI code of conduct for mutual fund distributors

This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.