SEBI Probes Front Running by Quant MF – Know the impact

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Front Running
Front Running in Stock Market

Front running is an instance wherein the individuals associated with the fund house end up buying some stocks which the mutual fund house has decided to invest in. As the mutual fund houses manage hundreds/thousands of crores, whenever they decide to invest in a certain stock it will result in huge amount of demand creation.

Front Running gets executed in 2 phases.

Phase 1: Buy before mutual fund places bulk orders

This is when the front running individuals will buy stocks at normal prices before the mutual funds start placing the bulk buy orders on behalf of the fund house. When bulk orders enter the market, it increases the demand thereby pushing the prices upwards i.e., Law of demand and supply.

Phase 2: Sell and book profits

Post completion of mutual fund’s purchases, which would have pushed the prices upwards, front running individuals start selling their share of stocks at increased price for profits.

Impact of Front Running investigation result for Investors

Negatively: If the fund managers are involved in this front running scam, they are going to be penalized and will be removed from their current roles, which will raise a question mark on the performance of the funds.

Insignificant Impact: If this is done by the dealers or other employees who are not engaged in the stock shortlisting exercise. They will also be removed from their current roles. However, this won’t have a significant impact on the fund performance.

In both of these scenarios, Asset Management Company will adopt strict and advanced measures to ensure this kind of instances do not repeat in future and investors interest is safeguarded.

Be assured, we are tracking the issue and will keep you updated if any change is required in your respective portfolio.

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