Quant Mutual Fund-Sebi probe: Impact on investors, SIPs and STPs decoded

 In the wake of an ongoing investigation by the Securities and Exchange Board of India (Sebi) into possible front-running activity, Quant Mutual Fund has received some backing from research firm Fisdom as it believes  Quant's structure offers some buffer against a potential investor exodus.  

Fisdom's rationale is as follows:

Portfolio diversification: Quant's assets are spread across nearly two dozen equity funds, mitigating the impact of any single underperforming fund. "The fund house manages a diverse portfolio of 21 equity-dedicated funds with assets well spread across funds. Assets appear to be effectively distributed across client segments. We estimate the fund house to be managing investments pegged to over 70 lakh folios," said Fisdom in a research note.

Broad Client Base: Their vast and diverse client base ensures a mass withdrawal from one segment wouldn't cripple the entire fund.

Strong SIP Book: A robust Systematic Investment Plan (SIP) program exceeding Rs 1,200 crore provides consistent inflows, potentially offsetting investor redemptions. "We estimate the fund house to be managing a healthy SIP book of over Rs 1,200 Cr. reflecting sticky retail inflows that is expected to anchor invested AUM meaningfully within current ranges," noted Fisdom.

Liquid assets: Presumably, Quant holds some readily saleable stocks to meet any immediate redemption needs.

"We view the liquidity profile for both funds relatively comfortable versus key category peers. Such an assessment is attributable to relatively higher allocations to more liquid largecap stocks even in pure midcap and smallcap funds along with a higher proportion of cash. At the same time, it is expected that the fund house will attempt to liquidate more liquid positions while being conscious of risks associated with elevated impact cost as it moves down the liquidity curve within holdings," noted Fisdom.

Fisdom recommends that long-term equity investors, including those invested through SIPs and STPs (Systematic Transfer Plans), hold on to their existing investments in Quant funds.  However, they've assigned a "Watch" outlook due to the ongoing investigation, emphasizing the need for close monitoring of the situation.

Front-running simplified

Front-running happens when a mutual fund manager or trader places orders on a security for their own account before executing client orders. This practice gives the trader an unfair advantage, enabling them to profit from the anticipated price movement caused by the subsequent larger client orders. Front-running is deemed highly unethical and illegal as it exploits confidential information and undermines market integrity.

How has Quant Mutual Fund responded

The mutual fund house has promptly committed to supporting the regulatory investigation process. “We want to assure you that Quant Mutual Fund is a regulated entity, and we are always fully committed to cooperate with the regulator throughout any review. We will provide all necessary support and continue to furnish data to SEBI on a regular and as-needed basis.”

Expected consequences if things go sideways

If Quant Mutual Fund or any of its individuals are found guilty of front-running, they could face severe penalties, including fines, suspension, and potential legal action. However, considering how mutual funds are merely pass-through entities, investor value continues to be held in the securities that the respective funds have invested in. Select stocks with limited float and the fund house’s participation may witness pricing pressure if the fund is forced to sell to meet redemption needs or if other market participants decide to steer clear of these stocks.

Concerns about small-Cap holdings:

Fisdom acknowledges concerns surrounding Quant's management of a large small-cap fund (Rs 20,000 crore in AUM) and its potential liquidity in case of significant investor redemptions.

Quant's liquidity advantage:

However, Fisdom's analysis reveals a relatively comfortable liquidity profile for Quant compared to its peers. This is attributed to Quant's strategy of including allocations to liquid large-cap stocks even within their mid-cap and small-cap funds. This provides a buffer against potential redemption pressure.

Unique stock holdings don't pose major risk:

One of the talking points surrounding Quant is its selection of stocks that are not commonly held by other fund managers. Fisdom downplays this concern, noting that the exposure to these unique holdings is minimal.  Even if a specific stock experiences a price decline, the overall impact on the fund is likely to be negligible due to the low allocation.