Investors trust mutual funds to manage their earned money efficiently and ethically. However, certain unethical practices like front running have shaken up investors’ trust in the past. From HDFC mutual funds to the axis and more recently, Quant Muturfund, front-running scams have raised concerns about how funds run their homes. Sebi is actively cracking down on such cases, but it is essential that investors remain vigilant. But what’s on the front line? Also, how can you identify the red flag before it’s too late? Let’s dive deeper.
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What is the ultimate scam in mutual funds?
Frontrunning is an illegal practice in which a fund manager or dealer trades securities in a personal account before carrying out a large transaction on behalf of a mutual fund. Large capital orders affect stock prices, so frontrunners use price movements to sacrifice investors to make personal profits.
For example, if a fund manager knows that a mutual fund will buy a large amount of shares, they may first purchase it on a personal account. As the fund’s bulk orders go on, the stock price will rise and you will be able to sell with profits. This unethical practice distorts fair market pricing and undermines investor trust.
Historical frontline scams in mutual funds in India
In recent years, several mutual fund homes have faced frontline claims. Here are some major cases:
- HDFC Mutual Fund (2020)
In July 2020, SEBI was punished by an entity associated with HDFC AMC for engaging in frontrunning. Certain dealers used insider information to trade stocks prior to official fund transactions. - Axis Mutual Fund (2022)
One of the most well-known cases of recent years, the Axis Mutual Fund has finished chief dealer Viresh Joshi and fund manager Deepak Agrawal on suspicion of front running. Sebi and the Enforcement Bureau conducted a search and investigated illegal trading practices more deeply. Before the scam broke out, the Axis mutual fund scheme was far outweighing its peers. I repeated this in the article Axis Mutual Fund is the worst performance of 2022. - QUANT MUTIOL FUND (2024)
The Quant Mutual Fund, the latest case under Sebi’s radar, faces a front-running allegation in June 2024. Sebi raided offices in Mumbai and Hyderabad to investigate irregular trading activities by insiders. Many people were revealed before the scam was revealed The QuantMF scheme provided an unusually high return compared to the peer. However, after regulatory scrutiny, these funds have begun to slow performance, indicating potential mismanagement in trade.
How to find frontline warning signs in mutual funds?
While investors do not have direct access to internal fund transactions, certain red flags can demonstrate unethical practices. This is what you should look for:
- Unusual inventory movements before the fund’s announcement
A stock may show an unusual price surge or fall before a mutual fund discloses a buy/sell transaction, which could mark a frontal turnover. - Frequent changes to fund manager or dealer
If a mutual fund frequently changes its fund manager or chief dealer without a clear reason, it could indicate an internal governance issue. - Sudden performance drops spikes or schemes
If a mutual fund scheme suddenly performs or poorly without legitimate market reasons, it could be due to internal operations. For example, the Axis mutual fund scheme provided excessive returns before fraud surfaced, followed by considerable misperforming. Similarly, the Quant Mutual Fund scheme showed extraordinary benefits before being scrutinized by Sebi, and its performance has since deteriorated. - Regulatory investigations and whistleblowers report
Keep an eye out for SEBI reports, media articles, and whistleblower claims. Even the initial investigation can be a sign of a potential problem. - Excessive portfolio burning
High turnover rates in mutual fund portfolios may indicate excessive trading that may be related to front turnover.
You can also check Bullet evidence to protect your MF portfolio from fraud.
Tips for protecting mutual fund investments
As an investor, you can take aggressive steps to protect your portfolio from funds involved in unethical practices:
- Stick to a highly reputable fundhouse
AMC can have issues, but sticking to a well-regulated, transparent fundhouse with a clean track record will reduce the risk. - Check your portfolio regularly
Keep an eye on the fund’s portfolio disclosures. If your fund frequently buys and sells the same stock, do some further research. - Follow the SEBI & AMFI guidelines
SEBI regularly updates regulations to curb fraud. Recognizing regulatory changes can help investors stay informed. - Monitor fund manager performance
Before investing, check out the past history of your fund manager. Please be aware if your manager has previously been involved in the controversy. - Diversify your investments
Spreading investments across multiple fundhouses minimizes the impact of unethical practices of a single fund. investment Diversified mutual fund portfolio Crossing the AMC will help reduce the risk here.
Conclusion: Front-running scams in mutual funds have caused great concern to investors. Sebi continues to tighten regulations, but investors need to be vigilant and informed. By being aware of early warning signs and following best practices, you can protect your hard-earned money from an unethical home of funds.
Have you ever doubted the irregularity of the mutual funds you invested in? Share your thoughts in the comments below!
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