The Quant mutual fund – SEBI saga

The retailer’s favourite Quant mutual fund is accused of ‘front running’ by SEBI. Unleash the whole saga in this article.

The Indian mutual fund industry has recently hit the mark of ₹ 58,59,951 crore assets under management (AUM) in May 2024. Retail investors like the idea of small and safe regular investments in diverse instruments through mutual funds.

However, due to this, the godfather Securities Exchange Board of India (SEBI) is keeping a close eye on the mutual fund houses. Its robust technical aids are picking up even the smallest irregularities in the market.

The Quant mutual fund has fallen prey to these strict measures and SEBI is investigating them for alleged practice of front-running methods. There are multiple questions – How did this happen? What should investors do?

Read this article to find solutions to these questions.

About Quant mutual fund

Established in 1996, Quant mutual fund has been in the spotlight for its splendid returns since 2021. Headed by Sandeep Tondon, the asset management company (AMC) is famous for its strong strategy and returns

The Escorts mutual fund was taken over by Quant Capital in 2018. The former was a sinking AMC with a total AUM of ₹235 crore in 2018. Further, the name was changed to ‘Quant mutual fund’, also widely known as Quant MF.

Investors are astonished by the growth of this firm. The top 5 schemes (by the AUM) generate 3 years return of nearly 30%. The credit for this growth goes to its investment framework, which they have followed since its inception. Their investment framework ‘VLRT’ focuses mainly – on the analysis of correct valuation, liquidity position, Risk appetite, and correct timing governing these factors.

In an article by the Economic Times, seven out of ten best equity mutual fund schemes were from Quant mutual fund, till February 2024.

(Data as of February 15, 2024)

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The SEBI probe

The market regulator, SEBI aims to safeguard retail investors from market volatility and illegal activities. It regulates the overall security market and is constantly implementing measures for the benefit of the public. 

As of June 24, 2024, SEBI accused Quant MF of ‘front-running’ which it declared as illegal in its circular in previous years. The market regulator suspects that an insider is leaking the information to any beneficiaries. It has taken action in the following ways:

• The beneficiary is suspected to be in Hyderabad and thus, SEBI raided the place. Moreover, SEBI raided the Mumbai headquarters of Quant MF.
• SEBI also seized the devices to tap the suspected leak of information.

The ‘front-running’ is a prevailing phenomenon in the market, yet the regulator considers it harmful as it can cause fluctuations in the market to affect the retail investors. The phenomenon can be understood with this hypothetical example:

‘MNO’ mutual fund is about to invest a huge amount of its ‘mid-cap fund’ in a company. The fund manager is aware of this decision and might engage in front-running. The fund manager would buy the shares of a similar company (in which ‘MNO’ is investing) from a friend’s account just before the mutual fund. Due to such a large buying, the stock price would increase. The fund would buy at this increased price and the fund manager would sell the shares. 

The whole event happened in a very short time, yet the fund manager would gain a substantial profit in this transaction. The vice-versa can happen. The fund manager would sell the shares when the mutual fund purchases them.

So, is the Quant mutual fund safe now?

The mutual fund house has immense potential and has performed at par with other top mutual funds. It reached the mark of ₹900 crore AUM in June 2024. However, following the SEBI probe, Quant MF faced some adverse effects.

The investors panicked due to SEBI’s red flag, and the withdrawal started. In the final week of June (during the SEBI investigation), there was a large outflow of ₹1,398 crore, mainly from their top 5 schemes by asset under management (AUM). As per MoneyControl, AUM of these funds, on July 9, 2024, are as follows:

As of June 28, 2024 – The immediate effect of SEBI’s probe was evident by the declining net asset value (NAV) of some of its schemes. Quant small cap fund NAV declined by 0.6%, Quant active fund NAV was down by 1.21%, and so on.

The fund mailed its investors the frequently asked questions (FAQs) regarding this whole scenario. Moreover, the founder also assured its investors of the safety of their hard-earned money and of the continued efforts towards performing the best over a video call to its investors.

Against all the odds, the techniques and growth mindset of the Quant mutual fund may not be affected even a bit. There would be short-term panic selling among the investors, which may affect the quarterly results. However, if the company operates with the present strategies and framework, then in the long term, it will regain its performance levels soon.

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Conclusion

The whole saga of SEBI investigating Quants mutual funds has mainly two aspects as follows:

• Strong surveillance of market regulator – SEBI assures the retail investors of the safety of their funds.
• The Quant mutual fund may need some time to regain its previous level.

However, the fund house has the potential to grow its investors’ money which is reflected by its long journey from ₹235 Crore to ₹900 crore AUM.

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DISCLAIMER: This article is not meant to be giving financial advice. Please seek a registered financial advisor for any investments.