Quant Mutual Fund Confirms Sebi Investigation Into Irregularities: What Retail Investors Should Know?

Quant Mutual Fund on June 24, 2024, confirmed that it has received inquiries from the Securities and Exchange Board of India (Sebi) and is fully committed to complying with the review. In a letter to its investors, quant Mutual Fund said, "We will provide all necessary support and continue to furnish data to SEBI on a regular and as-needed basis". Sebi possibly launched an investigation into alleged front-running allegations at Quant mutual fund, Moneycontrol reported adding that the search and seizure operation was conducted at locations in Mumbai and Hyderabad where dealers connected with the case were questioned.

According to sources, Sebi has taken action following discrepancies noted during regular inspections. Audit firms had also raised concerns following their inspections.

What Retail Investors Should Know?

Dev Ashish Sebi Registered Investment Advisor and Founder StableInvestor.com calls for a measured approach because the redemption pressure cannot be fully assessed at this stage due to limited available information.

"I guess a certain number of investors may opt to exit, resulting in redemptions. But a large impact on NAV is unlikely. Remember the funds also have cash/equivalents and more liquid largecap stocks in the portfolio that can be used to handle temporary liquidity concerns rising due to redemption pressures," Dev said.

"Securities and Exchange Board of India (SEBI), known for its investor-friendly policies will not take any measure that risks retail investors' investments in stocks through Asset Management Companies (AMCs)," he said.

However, he asks investors to remain attuned to new developments because if many investors get jittery and exit or if selling pressure increases from mass redemptions in low-float stocks or funds that hold large quantities of midcap and smallcap stocks, it can negatively impact the fund NAV.

Basavaraj Tonagatti, a certified financial planner (CFP) said, "These are ethical issues that are difficult to address through rules and regulations. As of now, the extent of the issue remains uncertain; however, based on previous instances of leading cases, it may be advisable to adopt a cautious approach of observing and monitoring the situation rather than taking immediate action."

Quant Mutual Fund has been one of the fastest growing fund houses with assets of over Rs 93,000 crore from over 80 lakh folios, according to a letter sent to investors. Quant Group started operations in 2008, received its mutual fund license in 2017 and currently is in 18th position in the mutual fund industry in terms of AUM.

At Quant, funds with the highest AUM include its small-cap fund (Rs 21,243 crore), mid-cap fund (Rs 7,593 crore) and active direct fund (Rs 10,204 crore). On individual stock front, the small-cap stocks with substantial funding and high PE may see some volatility such as Jio Financial, Irb Infra Dev, Bikaji Food International, etc.

Background: Front Running at Mutual Funds

Front-running means a stock broker trades through his personal trading account, or those of his accomplices based on prior insider information about a set of trades going to get executed soon. The front running can follow a Buy-Buy-Sell (BBS) or Sell-Sell-Buy (SSB) pattern. In the Buy-Buy-Sell (BBS) trading pattern, insider information of an impending big order is used to place the front runners' buy order. Once the larger trade is processed, the demand and price for the said scrip increases, when the front-runner sells his scrips at a profit. In the Sell-Sell-Buy (SSB) pattern, the information obtained is regarding an impending sell order. The trader sells his scrips before the large sell order goes through. After the price falls, he repurchases the sold scrips at an even lower price.

In 2022, the market regulator undertook an investigation on front running against Axis Mutual Fund barred 21 entities from accessing capital markets in 2023 and impounded Rs 30.5 crore gains from front running. In April 2024, employees of Aditya Birla MF also suffered Sebi's penalty of Rs 2.8 crore on front-running with a six-month debarment.