Dark Cloud over High Returns: Front-Running Erodes Investor Trust

India mutual fund industry has been rocked once again by allegations of front-running, this time involving the high-flying Quant Mutual Fund. Known for its impressive returns and a meteoric rise in assets over the last few years, Quant MF now faces a regulatory probe, casting a shadow over its past performance. This isn’t an isolated incident. The Axis MF case in May 2022 and earlier instances involving established names like HDFC AMC and Nippon India Mutual Fund (formerly Reliance MF) highlight a persistent issue.[EasyDNNnews:PaidContentStart]

These cases, despite SEBI’s stringent regulations, raise a crucial question: how can we prevent front-running and restore investor confidence in the industry? I believe MF houses must implement robust internal controls with clear segregation of duties. This makes it difficult for individuals to access both order flow information and personal trading accounts. Besides, with the advancement in technologies, algorithms should be used for advanced trade surveillance so as to identify suspicious trading patterns and flag potential front-running activities. 

Also, the incentive structure should be designed in a way that should discourage them from taking undue risks or engaging in front-running. From the AMCs perspective, they should be more transparent about their investment strategies and execution processes. This allows investors to make informed decisions and hold AMCs accountable. SEBI’s proactive approach in investigating these cases is commendable. 

However, a multi-pronged attack involving AMCs, regulators and technology is essential to eradicate front-running. By implementing these measures, the industry can rebuild trust, ensuring that investors benefit from genuine investment strategies, not illegal practices. For Quant MF scheme investors, this case should not trigger a rush for withdrawal or putting an end to the SIPs. Yes, we advise you against engaging in lump sum investments. Past experience shows that it does not make sense to exit now purely due to this event. Happy investing! 

Shashikant Singh
Executive Editor

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