Last Updated on May 7, 2022 at 10:39 am
At this point in time, what we know for sure in the Axis mutual front running case is minuscule compared to what we do not know. Social media is abuzz with all kinds of speculations/allegations about the suspended fund managers – what they did and how much wealth they amassed. Let us try to gather some equanimity and address the difficult question: What should Axis Mutual Fund Investors do in light of these illegal practices?
Anger at the fund managers or the fund house is not going to help us much and is most likely to lead to bad decisions. So let us consider the facts calmly.
Front running (in the current context) is a fund manager and their associates buying shares in their personal account(s) before the shares are purchased by a fund. Since the fund would place a large order, the price will move up. So the fund manager would get an immediate gain that can be sold off. Naturally, this is illegal and unethical and is banned by SEBI.
The lower the market cap of the stock, the higher the price boost (aka impact cost). We had already pointed out that beyond the top few stocks, the bid-sell price difference can quickly increase: Warning! Even large cap stocks are not liquid enough! Can you handle this?
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We are not yet aware of the full extent of “irregularities” being investigated by the fund house but can answer some questions based on the available information.
Will front running affect mutual fund unitholders? Yes. The personal orders by the fund manager and associates can be large enough* to drive up the price before the AMC buys the stock. *If it is not large enough, why would the matter come to light?!
Did the benefits of front running affect the investment decisions of the fund house? This is impossible to prove but once a fund manager has personal profit in mind, there is a conflict of interest and we will have to assume the worst.
Can we assess the damage caused by these actions to the unitholder? A report with full disclosure would be necessary to even make a guesstimate. So again we will have to assume the worst – unlikely.
Is front running common in India? Even if we go by the cases that have come to light, it is extremely common! It is after all human behaviour to profit from information that only a few people know about. See for example Sebi slaps Rs 15 crore fine on Sharekhan, others over front-running activities.
Is front running common in Indian mutual funds? Even if we go by the cases that have come to light, it is extremely common!! Here are some news stories on mutual fund front running cases. The punished individuals include fund managers and brokers/agents associated with mutual funds.
- Reliance mutual fund: Sebi bans 3 individuals for 6 months in front running case (May 2021)
- IIFL AMC suspends service of employee caught by Sebi in front running case (Oct 2020)
- HDFC AMC front-running case: SEBI settles case with 2 entities (Sep 2019)
- A fund manager of Deutsche Mutual Fund and his parents paid nearly ₹ 5 crores to settle with SEBI a case of alleged front running in mutual fund trades (Dec 2021)
- Tata AMC with dealers (not employees) being guilty: SEBI unearths front-running racket by dealers at Reliance Securities (Aug 2020).
Is this similar to what happened at Franklin Templeton MF? That can be classified as insider trading that front running. See: Some Officials Redeemed Investments Before Winding Up, Shows Audit.
How long will it take for action to be taken? Could take years! This – Sebi slaps Rs 2 cr fine on 4 entities in HDFC AMC front-running case – took 12-13 years. The compensation(see below took 9 years).
Will unitholders be compensated for these illegal actions? Yes if SEBI deems fit. See for example HDFC Mutual Fund compensates investors of front-running losses. But it may take years and compensation would likely be minuscule!
Were the big wigs of Axis AMC aware of these illegal practices? Did they overlook them? Unless a full investigation is conducted and the findings made public, it would be irresponsible to comment on this.
Who is to blame here? Some employees of the Axis MF or Axis MF? Axis MF should take the blame and be blamed for letting this happen. The argument that “only some individuals did it and the AMC is not to blame” is childish, to say the least.
Is this going on in other mutual fund houses as well? Given the evidence of past irregularities, it would be a big surprise if it is not!
Does front running happen with index funds? Yes, but it is not illegal as which stocks will enter or leave an index is public information.
Should AMCs not fight front running better? Should SEBI not be more proactive? We need to be practical here. All legislation relies on the honour system beyond a point. If individuals are hell-bent on breaking the law, then it is likely to be broken. All we can say is, that better disclosure and regular checks are necessary to minimise such instances. Of course, easier said than done!
Will the NAV of some Axis equity funds suffer because of these allegations? Yes, it is possible. There are reports of some holdings being shorted. However, with the markets already in the doldrums how much of the fall (if it happens) is because of these allegations and how much of it is due to typical market volatility will be impossible to ascertain. Since these funds are reasonably diversified, the impact on a few stocks will not severely affect the NAV.
Will the debt mutual funds of Axis also suffer? The suspended individual did not manage debt mutual funds. So we do not expect any impact on them. If investors start behaving like a mob and head for the door then redemption pressure may be higher in debt funds than equity funds. As of now, there is no reason to believe it would happen. We hope it will not!
What should Axis Mutual Fund Investors do in light of these illegal practices?
The information known officially is not enough to ascertain the width and depth of the irregularities. Unsatisfactory as it may be for the reader/investor, it would be imprudent and irresponsible on our part to recommend a simple “exit” or “stay” based on the information available at the time of writing.
Mass redemptions can cause bigger problems for both the fund house and investors especially in funds holding a good amount of mid cap and small cap stocks.
That said, we can only urge individual unitholders to do what would give them peace of mind.
Although the current scale of the problem is unknown, if we go by past front running cases, then waiting and watching (if not staying put) is not a terrible idea.
At the very least, investors angered by these developments can stop further investments in Axis MF and hope that other fund houses are not rocked by similar issues!
I can only state what I would do if I were an Axis MF unitholder (I am not so it may be easier for me to write this!): I would wait and watch with my existing units and take my new investments elsewhere.
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