Quant Mutual Funds Front Running Case – Should investors exit the mutual funds?

In the last few days there is a news item where there are allegations against Quant Mutual Fund about Front Running. SEBI did raid on their Mumbai headquarters and their Hyderabad office too. Front Running is not something new. Earlier there were similar incidents in Axis Mutual Funds too. As an investor of Quant Mutual Fund, you might be wondering whether this would impact you and your mutual fund portfolio and what action you need to take. I was waiting for some more update before writing this article, however there is no major incremental news after the initial news came out. In this article we would provide about Quant Mutual Funds Front Running Case and its impact on your mutual fund portfolio.

About Quant Mutual Funds

Quant Mutual Fund was established after it took over Escorts Mutual Funds in 2018. The size of the mutual funds was around Rs 300 Crores. However pre-covid i.e. Mar-2020 the AUM was only at Rs 180 Crores. Since then it rapidly grew and currently it has an AUM of over Rs 93,000 Crores. Significant growth in AUM is due to gaining investor confidence with outperformance in many of their mutual fund schemes compared to its peers.

What exactly is Front Running?

Front Running in stock market occurs where a broker or individual or a fund manager executes trades in their own account before executing it for their clients. With such advance information available, one can easily make money in the short term. Front Running is illegal in India.

Let me explain with an example. Assume that a fund manager is planning to execute a purchase order on 1-Jun and this information is leaked to a broker or individual. That broker / individual purchases those shares in advance and sells on 1-Jun when the purchase price is high when the fund manager is actually purchasing for the mutual fund scheme at market price on that day. In this process broker / individual who was aware of this information in advance is making huge amount of money in the short term.

Quant Mutual Fund Front Running Case – Should investors exit the mutual funds

What happened in Quant Mutual Funds Front Running case?

As per Moneycontrol report, SEBI suspects front running and conducted search and seizure operations at Sandeep Tandon owned Quant Mutual Fund headquarters located in Mumbai as well as their at their Hyderabad office last week. Fund Manager, dealers and people connected in this case were questioned.

SEBI surveillance systems have identified potential front running in Quant Mutual Funds where fund managers or any other person who has information about stock, size and timing of the execution of the order and this information was leaked to brokers or individuals who have benefitted from this.

The size of the Quant MF Front running scam is yet to be established, however there are various numbers floating around the internet ranging between Rs 20 Crores to Rs 25 Crores.

What could be the impact of the Quant MF Front Running Case?

Let’s recap what happened with similar incident that happened to Axis Mutual Fund Front Running case. Majority of the Axis MF mutual funds started under performing and scam broke-out. In case of Quant MF, we could not see any impact on the performance till last week. However, Quant Mutual Fund Investors can see below impact in coming weeks or months:

Quant MFs would have purchased the stocks with higher prices, i.e. Inflated prices. In short term we may see real prices of the stocks and NAV may drop.

There could be panic among investors and there could be redemption pressure. Due to this Quant MF has to sell stocks at market prices which could be lower. NAV would fall in this case.

There could be selling pressure with the equity investors who have invested in stocks which are invested by Quant MF thinking that at some point of time, MF house might sell such stocks and stock prices might fall.

Due to this front running allegations SIPs / lump sum investments could reduce. Fund managers might run out of funds and cannot invest in new stocks.

Short Term underperformance could be seen in their mutual fund schemes

What does Quant MF has to stay?

I am investing in Quant Mutual Funds too, and I got an email over the weekend from Quant MF indicating:

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Dear Investor

As a policy, we don’t comment on the media reports, however here is an important update to clarify some points to maintain transparency with all our stakeholders.

Recently, quant Mutual Fund has received inquiries from SEBI, and we want to address any concerns you may have regarding this matter.

We want to assure you that quant Mutual Fund is a regulated entity, and we are always fully committed to cooperate with the regulator throughout any review. We will provide all necessary support and continue to furnish data to SEBI on a regular and as-needed basis.

quant mutual fund has emerged as one of the fastest growing in the country and best performing fund houses in most of schemes. Our primary goal remains unchanged: to deliver superior risk-adjusted returns to all our valued investors. Your confidence in quant Mutual Fund is of utmost importance to us, and we are dedicated to maintaining transparency and adherence to regulatory standards.

We appreciate the confidence, faith and strength of 80 lacs plus folios and Rs. 93,000 Crore plus  AUM and we believe that the same support will continue as quant’s research capabilities and analytical tools will keep our investors ahead in the curve and we remain committed to deliver superior risk-adjusted returns in the future too.

We wish to thank you once again for showcasing the continued trust in quant Mutual Fund.

Regards,

Team quant Mutual

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Is Axis MF Front Running Scenario different compared to Quant MF Front Running Allegations?

Axis MF announced in May-22 that there were front running allegations which they have been investigating from Feb-22 and these were addressed. Some of the mutual funds NAVs were high in Feb-22 and gradually we could see Axis MF were worst performing mutual funds for 1 year. Means by the time investors came to know the damage was much higher. Later on we could see revival in the performance of their funds, which is a different story.

In case of Quant MF Front Running allegations, it is just beginning of the investigation. If such allegations are thoroughly investigated by SEBI and found true, the Quant AMC might see redemption pressures and multiple other factors discussed above can have a negative impact the performance of the mutual fund schemes. These will have an impact in the short term for sure.

Should you exit Quant Mutual Fund Schemes?

Front Running though illegal in India is not new. Earlier we could see HDFC Mutual Fund Front Running in 2007, Axis MF Front Running in 2022 etc., As an investor, you might be wondering what should you do now?

  • Quant Mutual Fund Schemes has been outperforming its peers in midcap, smallcap and several other MF categories. Their investment model is different and difficult to understand too. Hence they are able to deliver superior returns compared to their peers. I may be wrong, but personally I would not be in a panic situation considering the outperformance all along. If they are able to deliver 5% to 10% higher returns compared to peers, I am okay to loose such extra returns till we conclude on ongoing allegations. If allegations are found true, I may decide and reduce the value of my investments with them.
  • I keep advising investors to diversify across various market cap of funds along with diversifying across AMCs too. If you have invested heavily in Quant mutual fund schemes, it is time for you to pull the socks and correct it. Don’t rely on single AMC funds. You could lose your money.
  • If you have invested in Quant equity funds and in need of money in the near term, then your investment strategy itself is wrong. You cannot park short term money in equity funds. Just go ahead and redeem them irrespective whether the allegations are true or not.

I have personally invested in Quant Mutual Fund Schemes  and I would remain silent till the allegations are found true. However, I would keep an eye on the progress being made by SEBI Investigations and also keep track of the performance of the Quant mutual fund schemes for short term before taking any call.

In coming days, I would write article about how Quant Mutual Fund Schemes are outperforming compared to peers which might be an interesting story for investors to read.

Suresh KP

18 comments

  1. I have just started (last month) SIP in Quant mutual fund with monthly Rs 10000. Should I continue or stop the SIP. I have no other schemes from Quant. Thank you

    1. 1) You have just started, hence you may not see any impact now, but you need to wait and watch on SEBI investigation
      2) You have not diversified across AMC or across MF categories. Please invest in non Quant funds too and other funds from largecap/midcap/smallcap/flexicap/balanced advantage funds too based on your risk appetite and financial goals

  2. I am an investor in 3schemes of Quant Mutual fund, Your article about allegations against Quant Mutual Fund is timely , as You correctly advised to wait and watch the progress of SEBI Investigation on this matter is worth considering. Keep MF investors like me informed, Thanks
    K S Velu

  3. Nice information Mr. Suresh. We are reading your articles regularly. Its gives confidence to us.

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