Quant MF Front Running Allegations: What should investors do?

Published: June 24, 2024 at 9:19 am

Last Updated on June 24, 2024 at 11:41 am

On June 23rd 2024, Moneycontrol reported that SEBI conducted search and seizure operations at two locations of Quant Mutual Fund on suspected front-running. In response, the AMC has confirmed via email to investors that it has received inquiries from SEBI but has not added more information.

At the time of writing, information on this (first, how true these allegations are, and if so, to what extent) is not known. It is not yet known for sure if the SEBI enquiry is for front-running and/or any other issue. Anger at the fund managers or the fund house will not help us much and will likely lead to bad decisions. So, let us consider the facts calmly.

Front running (in the current context) is when AMC employees or their associates, brokers, etc., buy shares in their personal account(s) or leak information before a fund purchases the shares. Since the fund would place a large order, the price will move up. So, those who purchased shares with the leaked information would get an immediate gain that can be sold off. Naturally, this is illegal and unethical and is banned by SEBI.

The lower the stock’s market cap, the higher the price boost (aka impact cost). We have already pointed out that the bid-sell price difference can quickly increase beyond the top few stocks. Warning! Even large cap stocks are not liquid enough! Can you handle this?

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

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?!

Naturally, now, many investors may want to exit. This could cause redemption pressure and affect the NAV. Some market players may short the large holdings of the fund house. No one can predict what will happen. My guess is that redemptions will increase, but it may not be so high to affect the NAV too much. Things should settle down in a few days. For now, the fund manager can use the cash equivalents or large cap stock to handle redemptions.

 Is front running common in India? Even if we go by the cases that have come to light, they are 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, they are 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.

Is this similar to what happened at Franklin Templeton MF? That can be classified as insider trading rather than front-running. See: Some Officials Redeemed Investments Before Winding Up, Shows Audit.

Will unitholders be compensated for these illegal actions? Yes, if SEBI deems fit. For example, HDFC Mutual Fund compensates investors for front-running losses. But it may take years, and compensation would likely be minuscule!

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.

The official information is not enough to ascertain the width and depth of the situation. 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.

Note: I am not a Quant MF investor. So it is easier for me to write this! But if I were, I would wait and watch with my existing units wait for clarity before I put in fresh money.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)