Markets regulator Sebi’s investigation into a suspected case of front-running in Rs 93,000 crore Quant Mutual Fund has lakhs of investors worried about the fate of their investments.
ICC T20 World Cup Live
While raiding Quant's Mumbai headquarter and the Hyderabad premises of suspected beneficiaries, Sebi has seized mobile phones, computers and other digital devices to find out who was leaking confidential information from the asset management company to make illicit profit.
The hand of either a dealer from a Quant entity or a broking firm through which the AMC places order is being suspected in the case, ET reported.
Also Read: Are ‘black box’ quant funds reliable? Should you invest in quant mutual funds?
What is front-running?
Front-running happens when a person, usually an insider or a broker, makes a trade in advance based on privileged information. For example, if a broker who knows that a big client is going to buy a large number of shares of a company and he also buys some shares in his personal account before the transaction is done, then it is a case of front-running.
You Might Also Like:
The practice is not only unethical but also illegal and banned under Sebi regulations.
What happened at Quant Mutual Fund?
Sebi's surveillance system indicated a case of front-running by suspected entities who were privy of what Quant Mutual Fund was going to buy or sell. It is suspected that Quant executives who knew the size and execution timing of the orders may have passed on confidential information regarding the impending trade order to suspected beneficiaries, ET reported.
The AMC said it will provide all necessary support and furnish data to Sebi on a regular and as-needed basis.
You Might Also Like:
Is this the first case of front-running in a mutual fund?
No. The last such case from the asset management industry was reported at Axis Mutual Fund in which Sebi barred the fund's dealer and 20 other entities from the securities market impounded wrongful gains worth Rs 30.55 crore.
Back in 2007, a front-running case was also reported at HDFC Mutual Fund.
"I have seen the mutual fund industry since 2001 (my first job), and I know that front running has been part of it for donkey years," Vivek Bajaj of StockEdge wrote on social media platform X.
Also read | Quant Mutual Fund issues clarification on Sebi probe in front-running case
You Might Also Like:
How does it impact Quant Mutual Fund investors?
The fund house may see redemption pressure as a result of the negative news flow, leading to a fall in NAVs. Smallcap stocks in which Quant MF had significant positions can also come under selling pressure.
"There might be selling in mid & small stocks that Quant holds and expect some underperformance by the funds in the near term," said Kirtan Shah of Credence Family Office.
If Sebi finds front running, redemptions will happen and hence near term underperformance but their process to select stocks have been working well, he said on X.
He said liquidity would not be a problem from a redemption perspective as both its smallcap and midcap funds have almost 10% each in RIL alone.
Prime Investor, which advises investors on mutual funds and other products, has issued an exit call on all equity and hybrid funds of the AMC saying the news can cause enough damage to sentiment and impact redemptions.
"An exit is further necessary in Quant funds given that many of their stocks are momentum plays, and sudden redemptions and disruptions in inflows can have a greater impact on such strategies," the research firm told clients.
Is your money at risk?
Front-running erodes investor trust in the fund house, which can lead to redemptions, affecting the fund's Net Asset Value (NAV), analysts say. The investigation itself can create uncertainty, causing investors to hold off on further investments or even redeem existing ones until the situation is resolved.
"In most cases, investor money in mutual funds is held securely. Even if the fund house is penalized, investor money is typically not directly at risk. The Securities and Exchange Board of India (SEBI) is the regulator, and their primary focus is protecting investor interests," said Amit Goel of Pace 360.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
