Explained: How Big is Quant Mutual Fund and Should Investors Be Worried?

Market regulator Securities and Exchange Board of India (SEBI) is looking into investment company Quant Mutual Fund on suspicion of front-running. The regulator conducted search operations at Quant’s head office in Mumbai and Hyderabad. SEBI also questioned Quant Mutual fund dealers and persons connected with the case.

SEBI suspects that either a dealer from Quant or a broking firm through which the fund house places orders was leaking information about the deals. SEBI officials seized all digital devices including mobile phones and computers during their raid.

Quant Mutual Fund, the fastest growing MF in India with assets under management (AUM) of more than Rs 90,000 crore, issued a statement, saying it will cooperate with the SEBI. The fund house said it will provide SEBI with all necessary data and maintain transparency.

Founded by Sandeep Tandon Quant Mutual Fund has seen significant growth since its inception in 2019 with its AUM growing from Rs 258 crore in January 2020 to nearly Rs 90,000 crore and 80 lakh plus folios in June 2024. It runs the country’s third-largest small-cap fund, handling assets under management (AUM) of more than Rs 21,243 crore as of May 31, 2024. The fund house received a mutual fund license from SEBI in 2017. It surpassed AUM of Rs 50,000 crore in January 2024 with 26 schemes and 54 lakh portfolios.

Front-running is an illegal practice where fund managers, dealers, or brokers with advanced knowledge of upcoming deals use that information to make personal securities purchases before executing client orders. This allows them to profit unfairly by manipulating the market.

Equity holdings of Quant MF:

Specialising mainly in equities, which constitute 97 per cent of its total AUM, the fund has positioned itself across various sectors including financial services, PSUs, and oil & gas to optimise risk-adjusted returns.

In the last one year, the Quant Small Cap Fund has given 64.6 per cent returns. Since its inception in 2001, the fund has given 20.4 per cent annualised returns.

The top holdings of Quant Small Cap Fund are Reliance Industries (9.47 per cent), Jio Financial Services (5.91 per cent), HDFC Bank (5.75 per cent), IRB Infrastructure Developers (3.77 per cent), Bikaji Foods International (3.15 per cent), Aegis Logistics (3.12 per cent), Housing & Urban Development Corp (2.89 per cent), RBL Bank (2.81 per cent), National Aluminium Co. Ltd. (2.73 per cent), and Arvind (2.51 per cent).

Another major scheme, Quant Active Fund with an AUM of Rs 10,204 crore has given 55.8 per cent returns in the last one year. Quant Mid Cap Fund Direct Growth plan with an AUM of Rs 7,952 crore has given returns of more than 74 per cent in the last one year.

The top holdings of Quant Midcap fund include Reliance Industries (9.22 per cent), Aurobindo Pharma (7.86 per cent), Container Corporation (7.66 per cent), Samvardhana Motherson (7.08 per cent), HDFC Bank (5.91 per cent), Linde India (5.24%), Steel Authority of India (5.22 per cent) and others.

How the SEBI action will impact investors:

Stocks, where Quant Mutual Fund holds significant stakes, are likely to be under pressure for the next few days until further clarity on the issue.

Akshat Garg, AVP- Research, Choice Wealth says Quant's exceptional returns can be attributed to their meticulous stock selection and robust investment philosophy. “However, if allegations of front-running prove true, it could significantly undermine investor confidence, especially among those transitioning from traditional assets like fixed deposits and savings accounts to modern investments such as mutual funds,” he said.

The stocks in which the Quant Small Cap fund holds more than 5 per cent stake include Century Enka (7.87 per cent), Orchids Pharma (6.83 per cent), HCFL (6.42 per cent), Arvind (5.76 per cent), Stride Pharma Science (5.42  per cent), Keystone Realtors (5.40 per cent), Pix Transmission (5.21 per cent) and HEG (5.20 per cent). Most of these stocks except Stride Pharma Science and Pix Transmission fell up to 4 per cent on Monday.

 “If front-running is confirmed in the investigation, SEBI should take strict action. Such measures would serve as a deterrent to other Asset Management Companies (AMCs), emphasizing the importance of protecting investor money. While potential redemptions might occur, Quant's cushion of cash reserves and large-cap stocks could help mitigate the impact,” Garg added.

Sonam Srivastava, Founder and Fund Manager at Wright Research says that Quant holds a significant portion of midcap and smallcap stocks. Until there is further regulatory clarity, these stocks are likely to remain under pressure and witness panic selling.

Last year, SEBI banned Viresh Joshi and 20 more listed in the Axis Mutual Fund front-running case from buying, selling, or dealing in the securities market or associating themselves with the securities market. In addition, Rs 30.55 crore was impounded from these entities according to the unlawful profits they have made through their front-running activities.