Should recent events at Axis Mutual Fund worry India's retail investors?

India’s seventh biggest mutual fund house, Axis Mutual Fund, suspended two fund managers last Friday pending the completion of an investigation it has been conducting over the last two months.

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While the nature of the irregularities was not revealed, media reports say the fund managers were allegedly involved in front-running the trades of the mutual fund on their personal accounts.

Front-running is a dubious market practice in which an insider -- who is privy to a big future transaction by a fund or big investor -- takes advantage of the information. Large orders usually move a stock’s price and the insider buys shares just before the big order hits the market and sells them once the price moves up. It can adversely affect the investor in the fund and is banned in India. Several cases of front running have come to the fore earlier too.

 Last year, Sebi had taken action against three dealers of Reliance Securities for front-running the trades of Tata Absolute Return Fund, an alternative investment fund.

In 2006-07, the markets regulator found that an equity dealer at HDFC Mutual Fund was passing on trading information to an outsider entity.

The suspended fund managers allegedly informed brokers about stocks that they intended to buy in large quantities. The modus operandi was to benefit from a potential movement in stocks due to large orders from the fund house. 

The fund house has now reassigned their responsibilities to other fund managers in seven schemes, which have combined assets under management of over Rs 7,700 crore.

A financial daily reported that a preliminary investigation pointed to front running in as many as nine stocks that led to ill-gotten gain to the tune of Rs 170 crore.

Business Standard on Monday reported that Sebi is examining allegations of front-running and other irregularities against a number of domestic fund managers.

Developments at Axis Mutual Fund have reportedly prompted Sebi to speed up the probe to ensure that there is no drop in confidence in the Rs 39-trillion domestic mutual fund (MF) industry.

Axis Mutual Fund’s MD and CEO Chandresh Nigam tried to play it down, saying the recent developments do not impact the portfolios held by any of the schemes of Axis Mutual Fund. 

In a letter to investors, he said the fund house has not put any restriction on redemptions. Axis Mutual Fund manages assets worth Rs 2.59 trillion. 

India has more than 2.4 crore mutual fund investors with 10.3 crore folios. Should they worry over the recent events?

According to Deven Choksey, Managing Director, KR Choksey Investment Manager, possible front-running does not impact fund management, but investors should judge based on the performance of the fund. He says, front-running is a common problem in this industry across the globe and there are existing checks and balances which will be strengthened further.

Shriram Subramanian, founder and MD of InGovern Research Services, says that retail investors need not react in a knee jerk manner but should demand more transparency from the fund house

Speaking to Business Standard, Subramanian says, investors do not need to have a knee jerk reaction to Axis MF episode, as it doesn’t seem to be a systemic issue within Axis MF. But so far Axis MF and Sebi were not forthcoming about what transpired, and investors should seek an explanation from Axis Mutual Fund. A detailed explanation is necessary from the fund house, he says.

Experts say that the Axis Mutual Fund episode should be treated as an isolated incident and retail investors should not be too worried. However, in order for the mutual fund industry to hold on to the trust it has built over decades, transparency from the regulator as well as fund houses is paramount. Sebi should also take stringent steps against front runners. Barring erring entities from markets for a short period may not be enough.