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SEBI probes Quant mutual fund over front-running by employees

SEBI asks Exchanges to charge all members uniformly, to not offer discounts based on turnover volume

Quant Mutual Fund shook with a knee-jerk reaction when the Market regulator came knocking on their door accused the fund of potential front-running activities. The Securities and Exchange Board of India is undertaking an investigation into alleged irregularities in managing and investing investor money at one of the fastest-growing mutual funds in India, i.e., Quant Mutual Fund.

Front-running involves trading on privileged information before clients and buying stocks at the individual level before the fund does, driving the price up and potentially impacting returns for investors. Front-running is considered unethical and illegal because it exploits confidential information and weakens market integrity. It breaches the trust and fiduciary duty that fund managers owe to their clients. Sebi's surveillance system identified a potential front-running case involving entities with prior knowledge of Quant Mutual Fund's buying or selling plans.

Quant MF has become a prominent player in the Indian mutual fund industry, growing rapidly from managing around Rs 200 crores in 2019 to more than Rs 80, 000 crores currently. The fund invested primarily in equities with significant positions in the small-cap segment. The fund house has more than 10 schemes that provide over 60% returns annually.

Front-running erodes investor trust in the fund house, leading to redemptions and impacting the fund's net asset value (NAV). The investigation itself can create uncertainty, prompting investors to refrain from making further investments due to negative publicity or redeeming existing ones until the matter is resolved. Following a SEBI investigation into suspected front-running, Quant MF reported a net outflow of Rs. 1,398 crores.

Quant Mutual Fund has a substantial cash pile of over Rs 9,000 crore. This cash is not generated from selling the part of the portfolio, but because of the simple reason that fund managers are allowed to keep a part of their portfolio in cash to meet events like redemptions or make investments when they see a possible opportunity in the market. The fund house has around 21 equity mutual fund schemes, four of which have more than Rs 1,000 crore cash in their portfolios.

This is not the first instance of front-running in mutual funds. A previous case involved Axis Mutual Fund, where SEBI barred the fund's dealer and 20 other entities from the securities market. The media reported another front-running incident involving HDFC Mutual Fund in 2007.

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