Should the recent events of Axis Mutual Fund worry Indian retail investors?

India’s seventh-largest mutual fund company, Axis Mutual Fund, suspended two fund managers last Friday pending the completion of an investigation it has been carrying out for two months.

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Although the nature of the irregularities has not been revealed, media reports indicate that the fund managers were allegedly involved in handling the mutual fund’s transactions in their personal accounts.

Front-running is a dubious market practice in which an insider – who is aware of a large future transaction by a fund or a large investor – takes advantage of the information. Large orders usually change the price of a stock and the insider buys shares just before the large order hits the market and sells them once the price rises. This can harm the investor in the fund and is prohibited in India. Several cases of forward running were also highlighted earlier.

Last year, Sebi filed suit against three Reliance Securities dealers for directing the transactions of Tata Absolute Return Fund, an alternative investment fund.

In 2006-07, the market regulator discovered that an HDFC Mutual Fund stock broker was passing trading information to an outside entity.

The suspended fund managers reportedly told brokers which stocks they intended to buy in large quantities. The modus operandi was to take advantage of a potential move in the shares due to large orders from the fund house.

The fund house has now reallocated its 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 indicated a lead on as many as nine actions that led to an ill-gotten gain of Rs 170 crore.

Trade standard reported on Monday that Sebi was looking into allegations of high-profile and other improprieties against a number of domestic fund managers.

Developments at Axis Mutual Fund have reportedly prompted Sebi to fast-track the investigation to ensure there is no decline in confidence in the domestic mutual fund (MF) industry of Rs 39 trillion.

Managing Director and CEO of Axis Mutual Fund, Chandresh Nigam tried to play it down, saying recent developments had no impact on portfolios held by any of Axis Mutual Fund’s schemes.

In a letter to investors, he said the fund house had imposed no restrictions on redemptions. Axis Mutual Fund manages assets worth Rs 2.59 trillion.

India has over 2.4 crore mutual fund investors with 10.3 crore folios. Should they be worried about recent events?

According to Deven Choksey, Managing Director, KR Choksey Investment Manager, the possible front-running has no impact on fund management, but IInvestors should judge based on the performance of the fund. He says, front-running is a common problem in this industry across the world and there are the existing checks and balances that will be further strengthened.

Shriram Subramanian, founder and managing director of InGovern Research Services, says retail investors don’t need to react knee-jerk, but should demand more transparency from the fund company.

Speaking to Business Standard, Subramanian said, IInvestors need not have a knee-jerk reaction to the Axis MF episode, because IThis does not appear to be a systemic issue within Axis MF. But so far Axis MF and Sebi have not been clear on what happened, and IInvestors should request an explanation from Axis Mutual Fund. A a detailed explanation is needed from the fund house, he said.

Experts say the Axis Mutual Fund episode should be treated as an isolated incident and retail investors should not be overly concerned. However, for the mutual fund industry to maintain the trust it has built over decades, transparency from the regulator as well as the fund companies is paramount. Sebi is also expected to take strict action against the favorites. Banning wandering entities from markets for a short time may not be enough.

Dolores W. Simon