Front-Running in Mutual Funds: Cases, Recovery, and Investor Takeaways

  1. Insider Access: A broker or dealer learns about large trades the mutual fund plans to execute.
  2. Early Execution: This individual trades in his personal account or for another client, buying or selling shares before the mutual fund’s trade.
  3. Market Movement: Once the mutual fund’s large trade is executed, the stock price moves as expected.
  4. Profit Realization: The front-runner closes their position at a profit, leveraging the price movement initiated by the fund’s trade.
  • Mutual Funds: The fund buys stocks at a higher price or sells at a lower price than it would have, leading to reduced returns.
  • Investors: Investors in the mutual fund suffer diminished returns on their investments.
  • Market Integrity: It undermines market integrity, reducing trust among investors and damaging the reputation of financial institutions involved.
  • Aditya Birla Mutual Fund: In April 2024, SEBI settled front-running allegations, with four entities paying ₹3 crore and facing a six-month debarment.
  • Axis Mutual Fund: In March 2023, SEBI barred Viresh Joshi and 20 others from capital markets, seizing ₹30.5 crore in ill-gotten gains.
  • Deutsche Mutual Fund (DHFL Pramerica Mutual Fund): In December 2021, Akash Singhania and his parents settled their case by paying ₹5 crore.
  • HDFC AMC: SEBI slapped fine on 4 entities in July 2020 with the investigation by SEBI starting in 2006.
  • HDFC Mutual Fund: After implementing stronger compliance measures and improving transparency, the affected schemes recovered within a year, aligning performance with benchmarks. Some schemes underperformed benchmarks by 1-2% in subsequent quarters but recovered within a year.
  • Axis Mutual Fund: Post-reforms and personnel changes, Axis Mutual Fund stabilized within six months, with performance gradually improving as investor confidence returned. Certain schemes underperformed benchmarks by 2-3% over subsequent months, showing improvement within six months as new strategies were implemented.
  • If top-level management is implicated, the impact is more severe, potentially leading to significant changes, investor withdrawals, and a longer recovery period.
  • If only brokers or dealers are involved without management knowledge, the impact might be less severe. Prompt actions to replace involved parties and reinforce compliance measures can lead to quicker recovery.
  • In the Axis Mutual Fund case, accused fund managers allegedly made over INR 50 crore in illegal profits.
  • SEBI’s investigations have led to fines and penalties, including banning involved individuals from the securities market.
  • Despite these incidents, the Indian mutual fund industry has grown, with assets under management (AUM) reaching INR 58.91 lakh crore by May 2024.

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