In the last few days, allegations have been reported against quantitative mutual funds regarding front-running. SEBI has also conducted raids at their Mumbai head office and Hyderabad office. Front-running is not new. There was a similar incident with Axis Mutual Fund earlier. As an investor in quantitative mutual funds, you might be wondering if this will affect you and your mutual fund portfolio and what action you need to take. I had waited for a few more updates before writing this article, but there has been no major news after the initial news broke. In this article, Quantitative mutual funds are a precedent And how it could impact your mutual fund portfolio.
About Quantitative Mutual Funds
Quantitative Mutual Fund was set up in 2018 with the acquisition of Escorts Mutual Fund. The mutual fund size was around Rs 3,000 crore. However, pre-COVID, i.e. in March 2020, the AUM was just Rs 1,800 crore. Since then, it has grown at a rapid pace and currently, the AUM stands at over Rs 93,000 crore. The significant growth in AUM is due to the superior performance of many mutual fund schemes compared to their peers, which has earned the confidence of investors.
What is front running?
Front running in the stock market is when a broker, individual or a fund manager executes trades in their own account before executing the trades for their clients. With such advance information, they can make easy money in a short space of time. Front running is illegal in India.
Let me explain with an example. Suppose a fund manager plans to execute a purchase order on 1st June and this information gets leaked to a broker or individual. That broker/individual buys those shares in advance and sells them on 1st June when the purchase price is higher when the fund manager is actually buying for his mutual fund scheme at the market price on that day. In this process, the broker/individual who knew this information in advance makes a huge profit in a short period of time.
What happened in the quantitative mutual fund front-running scandal?
According to a Moneycontrol report, SEBI suspected foul play and conducted search and seizure operations at the Mumbai headquarters and Hyderabad office of Sandeep Tandon-owned Quantitative Mutual Fund last week. The fund manager, dealers and people connected with the case were questioned.
SEBI’s monitoring system has identified potential front-running in quantitative mutual funds, where fund managers or other persons have information regarding shares, size and timing of order execution and have leaked this information to brokers or individuals to make profits.
The size of the Quant MF frontrunning scam is yet to be determined, but various figures ranging from Rs 200 crore to Rs 250 crore are circulating on the internet.
What impact will the Quantitative MF Front-Running incident have?
Let us look back at a similar incident that happened in the Axis Mutual Fund Front Running case. Most of the Axis MF mutual funds underperformed and fraud occurred. In the case of Quant MF, no impact on performance was seen until last week. However, Quant Mutual Fund investors may see the following impacts in the coming weeks and months.
The quant would have bought the stock at a higher price, i.e. an inflated price. In the short term, the actual price of the stock may fall, causing the NAV to fall.
This may result in panic among investors and redemption pressure, which may force Quant MF to sell shares at market price, which may be lower, in which case NAV will fall.
Equity investors who have exposure to stocks in which Quant MF has investments may come under selling pressure as they believe that at some point, the MF house may sell such shares and the share price may fall.
This allegation of front-running is likely to result in a decline in SIP/lump sum investments as fund managers may run out of money and be unable to invest in new stocks.
Mutual fund schemes may see short-term performance decline
What does Quant MF require?
I also invest in quantitative mutual funds, and over the weekend I received the following email from a quantitative mutual fund:
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Investors
While as a policy we do not comment on media reports, we would like to provide here an important update clarifying certain points in the interest of maintaining transparency to all stakeholders.
Recently, Quant Mutual Fund has received queries from SEBI and would like to address any concerns you may have in this regard.
Quantitative Mutual Fund is a regulated entity and we are committed to always cooperate fully with the regulators during any review. We will provide all necessary support and continue to provide data to SEBI on a regular basis and as and when required.
Quantitative Mutual Fund has emerged as one of the fastest growing and best performing fund houses across most schemes in the country. Our primary objective remains the same – to deliver superior risk-adjusted returns to all our valued investors. Your trust in Quantitative Mutual Fund is of utmost importance to us and we are committed to maintaining transparency and adhering to regulatory norms.
We appreciate the trust, belief and strength of our 8 million+ portfolio and over 93,000 crores of assets under management and trust that similar support will continue as our quantitative research capabilities and analytical tools keep investors ahead of the curve and we remain focused on delivering superior risk-adjusted returns.
Thank you again for your continued confidence in Quantitative Mutual Funds.
Thank you.
Team Quantitative Mutual
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Is the Axis MF front-running scenario different compared to the Quant MF front-running allegations?
Axis MF announced on May 22nd that there had been allegations of front-running. The investigation was carried out and action was taken from February 22. The NAV of some mutual funds reached a high on February 22 and gradually Axis MF was the worst performing mutual fund in a yearThis means that by the time investors realized how much damage they were suffering, it was much larger. The performance of their funds subsequently improved, but that’s another story.
In the case of the allegations of quant MFs front-running, the investigation has only just begun. If SEBI investigates these allegations thoroughly and finds them to be true, quant AMCs may face redemption pressure and several other factors discussed above may negatively impact the performance of mutual fund schemes. These will definitely have an impact in the short term.
Should I exit quant mutual fund schemes?
Though front-running is illegal in India, it is not new – we have seen it before with HDFC Mutual Fund front-running in 2007 and Axis MF front-running in 2022. As an investor, you might be wondering what to do now.
- Quantitative Mutual Fund Schemes has outperformed its peers in midcap, smallcap and several other MF categories. The company’s investment model is unique and difficult to understand. This has helped it deliver superior returns compared to its peers. I may be wrong but given its strong performance so far, I personally don’t think there is any need to panic. If I can deliver 5%-10% higher returns compared to its peers, I don’t mind losing out on those additional returns until the ongoing allegations are resolved. If the allegations turn out to be true, I may decide to reduce my investment in the company.
- “I always advise investors to diversify across AMCs and also across funds of different market caps. If you have invested heavily in quant mutual fund schemes, now is the time to get serious and fix it. Don’t rely on a single AMC fund as you may lose your money.”
- If you are investing in a quantitative stock fund and need your money in the near future, your investment strategy is wrong. You cannot keep short-term funds in a stock fund. Just redeem them, regardless of whether the allegations are true or not.
I am personally invested in quant mutual fund schemes and will remain silent till the allegations prove to be true. However, I will be keeping a close eye on the progress of the SEBI investigation and will also track the short-term performance of quant mutual fund schemes before taking any decision.
In the coming days, I will be writing an article on how Quantitative Mutual Fund schemes are outperforming compared to their peers, which may be an interesting article for investors.
Suresh KP is the Founder of Myinvestmentideas. He is a NISM Certified Investment Advisor and NISM Certified Research Analyst. He has been involved in analyzing financial markets for the last 20 years. He can be reached at suresh@myinvestmentideas.com.
