“Quant mutual fund investors have been calling since morning. They want to know if they should redeem their holdings. However, we have been telling them to wait for some clarity to emerge,” said the CEO of a leading mutual fund distributor.
The fund house, which manages Rs 93,000 crore and has over 8 million investors, spooked the market when it informed that market regulator, the Securities and Exchange Board of India (Sebi) is investigating the company for front-running charges.
According to reports, Sebi suspects information leakage regarding trades, possibly involving a dealer at Quant or a broking firm used by India’s fastest-growing fund house. The regulator has also conducted search and seizure operations at Quant’s Mumbai and Hyderabad offices, as part of the alleged front running.
Front-running is where someone privy to information about a large impending transaction trades before the clients, giving themselves an unfair advantage.
On Sunday, the fund house clarified to its investors regarding the Sebi probe, saying it is “fully committed to cooperating with the regulator”. It further said it will provide the market regulator with all necessary support including supplying data on a regular basis.
Yet, uncertainty looms as market participants await further details of the Sebi investigation.
On Monday, several stocks held by Quant Mutual Fund experienced some declines. While Reliance Industries and Jio Financial in which the fund houses holds over 13% of its assets under management marginally fell by 0.82% and 1.47%, the other stocks among its top ten holdings also did not fall significantly.
Among others, Swan Energy saw the steepest drop, falling 4.8%. Steel Authority of India and Container Corporation of India fell by over 3.5% each. Shares of RBL Bank fell as much as 4.4%.
Experts suggest that the overall impact on investor wealth remains minimal for now. “Compared to the expectations of a significant fall, the impact of this issue has been negligible on the market as investors wait for more clarity. While there may be fund redemptions if Sebi’s probe turns out to be true, until then, incremental inflows might stop or lower,” said Kranthi Bathini, equity strategist at WealthMills Securities.
Further, if there were any rush for redemption, Quant Mutual Fund’s liquidity stress tests reveal that it would take 28 days to liquidate 50% of its small-cap portfolio and 14 days to liquidate 25%. For the Quant Mid Cap Fund, it would require nine days to liquidate 50% of its portfolio and five days for 25%.
“Quant MF funds have enough large cap investments in even small and mid funds of theirs. Both the funds have almost 10% each in Reliance alone. Liquidity is not a problem at all from the redemption perspective if at all.” said Kirtan Shah, MD – Private Wealth, Credence Family Office on social media.
He said there could be short-term underperformance due to selling pressure on mid and small stocks held by the fund house. If front-running is confirmed, he expects increased redemptions and slower inflows, though he remains optimistic about the fund’s long-term prospects if it continues to deliver returns.
This probe also draws parallels with a similar investigation into Axis Asset Management Co in 2022, where the employment of key personnel was terminated following such allegations. However, if Sebi finds out that Quant MF has misused investor funds, the action taken could be stricter, said experts.
As the situation unfolds, the mutual fund industry, and investors will closely monitor developments. Participants expect Sebi to soon come out with an official notice of the ongoing inquiries.