To exit or not to exit, that is the question


Neil Borate of LiveMint reported on June 25th 2024, that “₹800 crore has been redeemed from Quant since news broke of Sebi’s search and seizure operation on suspicion of front-running”. On June 26th 2024, Moneycontrol reported Quant Mutual Fund net equity outflow at Rs 1,398 crore or 1.5% of AUM post-SEBI front-running probe.

Investors are faced with the question – should I exit or not? Content portals like us also face a dilemma – what is the responsible stand to take here?

In a previous article – Quant MF Front Running Allegations: What should investors do? – We have already explained that in the absence of any concrete information, staying put while withholding future investments seems right to us, and it is what we would have if we had been investors.

It is time for SEBI to step in and make a statement. Tell the public why they made the raid and the current status of the enquiry. Their silence only makes things worse.

We must understand how redemption pressure works. When people redeem, the fund manager will initially sell cash equivalents and large cap stocks to ensure no impact on the NAV.

As more and more people redeem and this news spreads on social media, other investors who initially thought they would hold on can also start to redeem. Then, the fund manager will be forced to sell mid and small cap stocks in bulk.

These have a large impact cost. That is, the difference between the bid price and the ask price becomes larger and larger as the volume increases. This will result in a loss when sold, and the NAV will fall. Like crabs trying to get out of a bucket, redemptions will hurt future redemptions as they would receive lower and lower NAV.

Also, see Quant Mutual Fund had over Rs 9,000 crore cash pile to face redemption pressure after Sebi’s investigation. This should be able to bear the brunt of panic redemptions for some time.

As a writer, I feel irresponsible in recommending an exit call at this stage. One cannot spread fear and panic without evidence relying only on speculation and fear. It is an uncomfortable position, but it is better than spreading fear.

Even as investors, I think the reasoning should be the same. This is not a PMS where we have a direct relationship with the fund management. This is a “mutual” fund, and it will work only with the cooperation of investors regardless of how they feel about the SEBI probe.

If investors get into the “I want my money mode, I don’t care about anyone else” mode, then the whole concept of a mutual fund will quickly break down. Many readers may ask, “Why should I care about investors?”  It is impossible to counter this. All I can do is state the realities about rushing for the door.

NAV can fall (it is unlikely to crash as these are equity funds and not illiquid debt funds), but it should reasonably recover once clarity emerges. Then, investors can redeem if they wish to, as future outperformance could become a question mark. Haste makes waste.

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