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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Fund Distribution and Channel Management Practices

Which of the following is a correct description of a sub-broker-like practice that a mutual fund distributor must avoid, namely 'churning' a client's portfolio?

Recommending switches between schemes mainly to earn fresh commission is churning, which a distributor must avoid. It places the distributor's income ahead of the client's interest and can create exit loads and tax costs, whereas risk-based recommendations, SIP continuation and load disclosure are proper practices.

  1. ARecommending switches between schemes mainly to earn fresh commission rather than for client benefitCorrect
  2. BAdvising a client to continue a SIP for the long term
  3. CRecommending a scheme based on the client's risk profile
  4. DInforming the client about exit load before redemption

Explanation

Churning means inducing excessive switches or redemptions and reinvestments mainly to earn commissions. It conflicts with the duty to act in the client's interest. The other options are proper advisory conduct.

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