At this point in time, what we know for sure in the Axis mutual front running case is minuscule compared to what we do not know. Social media is abuzz with all kinds of speculations/allegations about the suspended fund managers – what they did and how much wealth they amassed. Let us try to gather some equanimity and address the difficult question: What should Axis Mutual Fund Investors do in light of these illegal practices?
Anger at the fund managers or the fund house is not going to help us much and is most likely to lead to bad decisions. So let us consider the facts calmly.
Front running (in the current context) is a fund manager and their associates buying shares in their personal account(s) before the shares are purchased by a fund. Since the fund would place a large order, the price will move up. So the fund manager would get an immediate gain that can be sold off. Naturally, this is illegal and unethical and is banned by SEBI.
The lower the market cap of the stock, the higher the price boost (aka impact cost). We had already pointed out that beyond the top few stocks, the bid-sell price difference can quickly increase: Warning! Even large cap stocks are not liquid enough! Can you handle this?
We are not yet aware of the full extent of “irregularities” being investigated by the fund house but can answer some questions based on the available information.
Will front running affect mutual fund unitholders? Yes. The personal orders by the fund manager and associates can be large enough* to drive up the price before the AMC buys the stock. *If it is not large enough, why would the matter come to light?!
Did the benefits of front running affect the investment decisions of the fund house? This is impossible to prove but once a fund manager has personal profit in mind, there is a conflict of interest and we will have to assume the worst.
Can we assess the damage caused by these actions to the unitholder? A report with full disclosure would be necessary to even make a guesstimate. So again we will have to assume the worst – unlikely.
Is front running common in India? Even if we go by the cases that have come to light, it is extremely common! It is after all human behaviour to profit from information that only a few people know about. See for example Sebi slaps Rs 15 crore fine on Sharekhan, others over front-running activities.
Is front running common in Indian mutual funds? Even if we go by the cases that have come to light, it is extremely common!! Here are some news stories on mutual fund front running cases. The punished individuals include fund managers and brokers/agents associated with mutual funds.
Is this similar to what happened at Franklin Templeton MF? That can be classified as insider trading that front running. See: Some Officials Redeemed Investments Before Winding Up, Shows Audit.
How long will it take for action to be taken? Could take years! This – Sebi slaps Rs 2 cr fine on 4 entities in HDFC AMC front-running case – took 12-13 years. The compensation(see below took 9 years).
Will unitholders be compensated for these illegal actions? Yes if SEBI deems fit. See for example HDFC Mutual Fund compensates investors of front-running losses. But it may take years and compensation would likely be minuscule!
Were the big wigs of Axis AMC aware of these illegal practices? Did they overlook them? Unless a full investigation is conducted and the findings made public, it would be irresponsible to comment on this.
Who is to blame here? Some employees of the Axis MF or Axis MF? Axis MF should take the blame and be blamed for letting this happen. The argument that “only some individuals did it and the AMC is not to blame” is childish, to say the least.
Is this going on in other mutual fund houses as well? Given the evidence of past irregularities, it would be a big surprise if it is not!
Does front running happen with index funds? Yes, but it is not illegal as which stocks will enter or leave an index is public information.
Should AMCs not fight front running better? Should SEBI not be more proactive? We need to be practical here. All legislation relies on the honour system beyond a point. If individuals are hell-bent on breaking the law, then it is likely to be broken. All we can say is, that better disclosure and regular checks are necessary to minimise such instances. Of course, easier said than done!
Will the NAV of some Axis equity funds suffer because of these allegations? Yes, it is possible. There are reports of some holdings being shorted. However, with the markets already in the doldrums how much of the fall (if it happens) is because of these allegations and how much of it is due to typical market volatility will be impossible to ascertain. Since these funds are reasonably diversified, the impact on a few stocks will not severely affect the NAV.
Will the debt mutual funds of Axis also suffer? The suspended individual did not manage debt mutual funds. So we do not expect any impact on them. If investors start behaving like a mob and head for the door then redemption pressure may be higher in debt funds than equity funds. As of now, there is no reason to believe it would happen. We hope it will not!
What should Axis Mutual Fund Investors do in light of these illegal practices?
The information known officially is not enough to ascertain the width and depth of the irregularities. Unsatisfactory as it may be for the reader/investor, it would be imprudent and irresponsible on our part to recommend a simple “exit” or “stay” based on the information available at the time of writing.
Mass redemptions can cause bigger problems for both the fund house and investors especially in funds holding a good amount of mid cap and small cap stocks.
That said, we can only urge individual unitholders to do what would give them peace of mind.
Although the current scale of the problem is unknown, if we go by past front running cases, then waiting and watching (if not staying put) is not a terrible idea.
At the very least, investors angered by these developments can stop further investments in Axis MF and hope that other fund houses are not rocked by similar issues!
I can only state what I would do if I were an Axis MF unitholder (I am not so it may be easier for me to write this!): I would wait and watch with my existing units and take my new investments elsewhere.
Do share if you found this useful
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 900 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2700 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 620 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
My new book for kids: “Chinchu gets a superpower!” is now available!
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps