The Sebi investigation into suspected front-running in Quant Mutual Fund has investors worried about their SIP or investments. ETMutualFunds reached out to experts to understand what investors should do with their investments. Most experts advocated staying invested rather than redeeming or stopping SIPs.
“Longer-term investors, including those who have ongoing SIPs/STPs, can continue to hold on to existing investments, as their investment horizon may allow them to weather short-term volatility and benefit from potential recovery. For investors seeking to liquidate investments in the very near term, it is prudent to de-risk by switching out of pure equity funds managed by the fund house. This strategy can help mitigate the risks associated with potential market reactions and regulatory actions,” says Sagar Shinde, VP Research, Fisdom.
Also Read | 495% returns! Quant Mutual Fund No. 1 in smallcap category in last 5 years
“Those investing without any professional guidance could still panic and redeem their funds. This will actually turn out to be a good thing for those who stay invested and continue to do so, through SIPs and STPs, as they would get a lower NAV,” said Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance.
The small cap and mid cap mutual fund schemes run by Quant Mutual Fund saw a marginal decline in their NAVs (net asset value) on Monday. The NAV of Quant Small Cap Fund scheme fell by 0.66% even as their benchmarks rose 0.0091%. The NAV of Quant Mid Cap Fund scheme fell by 0.94% even as their benchmarks rose 0.24%.
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The one day movement in the NAV of small and mid cap was marginally down. What should you do going ahead?
“We should continue to stay invested in fundamentally good funds and ignore such short-term fluctuations, but still continue to monitor them and take action, only when it is really needed,” said Minocha.
“Investors should closely monitor updates and be prepared to make further adjustments if the situation worsens or if there are significant adverse impacts on the fund’s performance,” recommends Shinde.
Over the last one year, the assets under management of Quant Mutual Fund have surged by around 251% from Rs 23,956 crore in May 2023 to Rs 84,030 crore in May 2024. The asset size of Quant Small Cap Fund and Quant Mid Cap Fund increased by around 357% and 303% respectively in the same period.
Also Read | How many days will Quant Mutual Fund require to liquidate 50% of its small and midcap portfolio? Check stress test result
Quant Small Cap Fund offered 495% absolute return in the last five years. The scheme is benchmarked against Nifty Smallcap 250 - TRI which gave 250% absolute return in the same time period. The scheme manages assets of Rs 21,243 crore as of May 2024. This is the largest fund that is managed by Quant Mutual Fund.
In the last five years, Quant Mid Cap Fund delivered an absolute return of 348.65% against 248.02% by its benchmark (Nifty Midcap 150 - TRI).
The funds have been among the top performers over different time periods. Now the question is how this investigation will impact the investments of the investors?
“If Quant Mutual Fund or any of its individuals are found guilty of front-running, they could face severe penalties, including fines, suspension, and potential legal action. However, considering how mutual funds are merely pass-through entities, investor value continues to be held in the securities that the respective funds have invested in. Select stocks with limited float and the fund house’s participation may witness pricing pressure if the fund is forced to sell to meet redemption needs or if other market participants decide to steer clear of these stocks,” said Sagar.
“SEBI has mentioned that they are only investigating. There is no judgement as yet on the front running. Quant's method of investing is very different. They are not based on the fund manager's discretion but follow the quantitative investing method. So, even if fund managers are changed in the future, the impact will be much less as the method of investment will still be based on their algorithm,” said Minocha.
This is not the first instance of front-running in mutual funds. Instances of front-running have occurred in the mutual fund industry, with notable cases involving Axis Mutual Fund and HDFC Mutual Fund. Sebi took action against Axis Mutual Fund by barring the fund's dealer along with 20 other entities. They also impounded wrongful gains amounting to Rs 30.55 crore. Another incident was reported in 2007 involving HDFC Mutual Fund.
“You may recall that a similar instance happened with another large AMC a couple of years back and now that fund house is bouncing back strongly. Those who stay invested are bound to get great returns over a long period. The mutual fund industry is heavily regulated and these are common,” comments Minocha.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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