Front-running Case at AXIS Mutual Fund: Should Investors be Concerned?

Think of yourself as a Fund Manager in an Asset Management Company (AMC) wherein the prima facie of your job is to generate considerable returns for your investors. If you are just able to do your job right, you make a fortune for your investors and will get handsomely paid by your AMC for meeting the expectations. However,?this is sometimes not enough for some individuals who opt to leverage the power they hold for earning money via illegitimate means. So, you might have a question now How does this relate to the Axis Mutual Fund? The above instance explained a term named front running in which two fund managers of Axis AMC were allegedly involved and have been suspended for sharing confidential information about the trades taken with some brokers in Gujarat, according to SEBI’s investigation. Now, what is front running? Front-running is defined as the purchase of a stock based on advance non-public information about a significant transaction that will affect the stock's price. Before executing the MFs' order, some fund managers buy the same shares in their personal accounts and when they buy the same in mutual funds in large volumes, the stock price is predicted to rise. Since a person engaged in front running expects securities price fluctuations based on non-public information, SEBI has classified it as a type of market manipulation and insider trading.

Continuing with the fund manager scenario, you're buying a bunch of stocks to build a portfolio that can help your customers make a lot of money. And, as the fund manager, you presumably have a solid sense of the types of equities that will help you get there. The Indian markets, on the other hand, are not very liquid. As a result, you don't always have enough buyers and sellers in each stock. So, if you were planning to invest a few crores in a small/ mid cap listed firm, you could find it difficult to do so. And every time you try to buy a stock, the act of buying itself will drive the price up. You'd have to keep buying them for even more money. This increases the cost of the process, but you can try to take advantage of it. For example, let's say you know you need to buy a lot of a certain stock for your AMC's portfolio and you tell someone else about it. Even before you begin your move, these people begin buying the stock. And once you've completed your part, the stock's value will skyrocket. Your friends/agents could now sell their shares for a profit. This was the malpractice going on at Axis AMC and you may ask what is their take on the incident- “Axis MF has been conducting a Suo moto investigation over the last two months (since February 2022). The AMC has used reputed external advisors to aid the investigation. As part of the process, two fund managers have been suspended pending investigation of potential irregularities. We take compliance with applicable legal/regulatory requirements seriously, and have zero tolerance towards any instance of non-compliance”.

The question now arises, "If it must have been reported to SEBI prior?” Well, the answer would be obvious, yes. Apart from the consequences to Axis AMC, investors in Axis schemes are also facing the heat, wherein the schemes like Axis Bluechip Fund, which used to derive 5 year average return of 14.16 (as of 20th May 2022) have made a hole in investor's pocket with -16.88% negative return during the last 6 months. Yes, we agree the markets are in a correction phase; however, such a fall is not visible in any other AMCs. This might also lead to investors losing trust in Axis AMC, with a fall in SIP and lumpsum investment from investors.

This also raises a question on what we as Investors should do? To simplify, we must ensure funds or scheme's performance is regularly monitored, even during passive investments in Mutual Funds. Alternatively, all investments can be made through Registered Investment Advisors, who keep track of all your investments, even for passive Mutual Funds and makes sure correct actions are taken in order to ensure your goal amount is achieved. A cup of coffee and a second opinion on your investment must always be welcomed. We would ensure all your investments are aligned with your goal and if they are, we would gladly let you know. If not, we will help you identify investments based on goals. Either way, the coffee is on us.

Analysis by - Rajat Singh