The capital market regulator SEBI’s crackdown on Quant Mutual Fund on a suspected front-running case will shake investors’ confidence in the fast-growing mutual fund industry, according to industry experts.

Akshat Garg, AVP-Research, Choice Wealth, said investors’ confidence, especially those who are transitioning from traditional assets such as fixed deposits and saving accounts to modern investments such as mutual funds, will be significantly undermined if the allegation of front-running comes true.

While potential redemptions might occur, he said Quant’s cushion of cash reserves and large-cap stocks could help mitigate the impact.

Front-running is an unlawful tactic where fund managers, dealers, or brokers use privileged knowledge about impending large transactions to execute their own trades in advance.

SEBI had conducted search and seizure operations at Quant MF offices in Mumbai and at the addressses of suspected beneficiaries in Hyderabad. Founded by Sandeep Tandon, Quant MF has been one of the fastest growing fund house. Its average asset under management increased multi-fold to touch ₹90,000 crore against ₹200 crore in FY19.

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In an e-mail sent to its investors, Quant MF confirmed that it has received inquiries from the Securities and Exchange Board of India. The email said, “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.”

Stress test results

The small-cap fund of Quant MF has an asset of ₹21,243 crore and has delivered a return of 69 per cent against the industry’s average of 55 per cent. Per the stress test results declared for May, Quant Small Cap Fund would take 28 days to sell half of its portfolio and 14 days to sell 25 per cent investment.

In the case of Quant Mid Cap Fund, it would require 9 days to liquidate 50 per cent of its portfolio and 5 days to liquidate 25 per cent of its asset. Top 10 investors hold 2.36 per cent of the AUM in the mid-cap scheme and 1.71 per cent in the small-cap scheme.

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Amit Goel, Co-Founder & Chief Global Strategist, Pace 360, said front-running erodes investor trust in the fund house, which can lead to redemptions and affect the fund’s Net Asset Value. The investigation itself can create uncertainty, causing investors to put off further investments or even redeem existing ones until the situation is resolved, he added.

Earlier, SEBI barred Viresh Joshi, the fund manager of Axis Mutual Fund, and 20 entities linked to him in a front running case.