MF Query Board

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With the recent case of front-running, what should investors do? And are mutual funds still a safe place to invest in?

- Ashish Singhi

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Axis Asset Management Company, which has assets under management of around `259,818 crore, has suspended two fund managers recently for various irregularities, including front-running the AMC’s transactions on their personal accounts. In this particular scenario, it has been observed that both the fund managers were not forthcoming about the details of the transactions they had made and even their personal investments. But first of all, let us understand what front-running means.

Front-running implies the following:

✓The acquisition of a stock based on non-public information and carrying out a large transaction that may impact the stock’s price.
✓Some fund managers acquire identical shares in their own accounts before executing the mutual funds’ transaction which in turn increases the stock price. MFs then acquire those stocks in significant quantities.
✓It is categorised as a sort of market manipulation and insider trading by the Securities Exchange Board of India (SEBI) since a person who engages in it expects securities’ price movements based on non-public knowledge. For front-running, the SEBI has previously examined and pulled up a number of fund firms and fund managers.
✓It is particularly widespread in mutual fund firms and international portfolio investors, according to market sources.

Front-runners profit handsomely, but not at the cost of mutual fund shareholders. The only people that lose out are the sellers who the front-runners buy from. They are not aware that a large purchase order will push up the stock’s price the next day. Front -running does not affect the mutual funds portfolio by and large. Investors should not panic and react quickly to sell off their investments. Instead, it is wise to wait and see how the affected mutual fund house is following up on this news. One can also demand an explanation from the fund house. Since a mutual fund portfolio is made up of many different companies’ shares, a considerable change in the price of two or more shares will hardly affect the investors’ overall investments. Investors should therefore not lose confidence in the system.

In the present falling market which I wish to take advantage of, I would like to start investing in equity mutual fund via SIP. Would flexi-cap funds be ideal for investing? Please suggest the best flexi-cap funds.
- B Banti

Indian equity indices have been very volatile since the past few months. The Sensex has lost 7.23 per cent since YTD, whereas the Nifty 50 has been down by 7.20 per cent since January 2022. This gives the investors a great opportunity to invest and take advantage of the market hitting rock bottom levels. You can acquire additional units of the plan when the market is at a lower level. You will receive fewer units if the market is at a greater level. When you invest on a regular basis, you may average your buying costs and obtain a larger number of units. This will assist you in maximising your profits. This is the justification for investing in SIPs over a lengthy period of time. When the market is down, fund managers say that a sale is taking place. You will be able to purchase stocks at favourable prices. You should not be concerned about market fluctuations if you are a long-term investor who is investing in accordance with your goals and risk profile. Always keep in mind that the best approach to invest is to do it on a regular basis over time.

In November 2020, the SEBI introduced flexi-cap funds. They are a new category of mutual funds that invest a minimum of 65 per cent of its fund corpus in equity. In this fund category, the fund manager has the flexibility to take exposure to Large-Cap, Mid-Cap and small-cap segments without any restrictions. So, a flexi-cap fund invests across all market capitalisations. This means that fund managers have complete control to limit or maximise exposure to a particular market-cap segment based on what their judgement about the segment’s performance in the future is. That’s the basic advantage of flexi-cap funds. They also mitigate the risk of concentration. For your guidance, here are some ideal top flexi-cap funds for investing according to your investment period:

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