Quant Mutual Fund probe: Should you stay invested or exit your investment?
Mutual fund investors have been jolted by the news that Quant Mutual Fund is under investigation by the Securities and Exchange Board of India (Sebi). The regulatory body has observed trading patterns that suggest front-running by someone associated with the fund. The Asset Management Company (AMC) has issued a pro forma statement, confirming the news and promising full cooperation with the probe.
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Front-running, a practice strictly prohibited in the financial industry, occurs when someone with insider knowledge of upcoming large trades uses this information for personal gain. In the context of mutual funds, it typically involves a fund manager, broker, or some other insider, who learns of a fund’s upcoming large trades and executes personal trades ahead of the fund’s orders. This allows the front-runner to profit from the price movements caused by the fund’s substantial trades, essentially stealing potential profits from the fund’s investors.
For instance, if a fund manager knows that the fund is about to buy a large quantity of a particular stock, he might personally buy the shares of that company first. When the fund’s large purchase drives up the stock price, the front-runner can sell his shares at a profit. This practice is not only unethical, but also illegal, as it exploits confidential information at the expense of the fund’s investors.
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