Due to fear of front running, SEBI took swift action against reputed mutual funds, what will be the impact on investors?

Quant Mutual Fund Front-Running Case News All Details: Market regulator SEBA has accused Quant Mutual Fund, which has an AUM of Rs. 93,000 crore, of front running. Search operations have been conducted at the offices of Sandeep Tandon's Hyderabad-based Quant Mutual Fund. Based on these measures, dry conditions have also been seen in the stock market today. Let's know what is front running and what effect it will have on investors.

What does front running mean?

Front running is illegal in mutual funds. Under this, the broker or dealer gets information about any upcoming mutual fund transaction, which benefits them. Mutual fund dealers deal in shares through middlemen. In which the middleman gets information about the deal in advance, so they take advantage of it.

This is how front running happens

When institutional investors like mutual funds enter the market to buy shares, intermediaries buy the shares before they enter the market. And when the mutual fund buys those shares, the intermediary benefits from the rise in its price. Also, when mutual fund houses plan to sell shares, these intermediaries book profits by short-selling their orders. Notably, they do not do this trading from their own accounts but transact through the accounts of associates.

What is the impact on investors?

Front-running has a negative impact on investors. For example, when arbitrageurs place such orders, investors suffer losses due to the stock's movements. For example, if a mutual fund is going to buy a large number of shares, the arbitrageurs themselves buy a large number of shares. This causes mutual funds to buy shares at a premium price, reducing the potential returns for investors. Thus, even at the time of a mutual fund's sale, if the shares have to be sold at a lower price, the returns are lower.

Impact of the Quant Mutual Fund case on investors

Quant Mutual Fund has been one of the top performing mutual fund houses for the last three years. Its AUM in January 2020 was Rs. 258 crores in June 2024. Rs. 90 thousand crores. Regarding SEBI's investigation in the ongoing case, market experts said that Quant Mutual Fund has significant investments in small and midcap funds and large caps. About 10% of both the funds are invested in Reliance alone. In such a situation, even if there is a need for withdrawal, there will be no impact on liquidity. Selling pressure has been seen in small and midcap stocks for some time now. Apart from this, the performance of the fund may also remain a bit sluggish.