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According to the latest news, Axis Mutual Fund has made changes to its fund management staff due to irregularities.

As a result, Viresh Joshi and Deepak Aggarwal have been removed from the management team. Viresh Joshi was the head trader and part of fund management team of 7 equity schemes. Deepak Aggarwal was the equity research analyst and fund manager of the management team of 3 funds. These schemes (combined) have more than Rs 7,700 crores of Assets Under Management as Axis Mutual Fund is India’s seventh-largest fund house. The total value of Assets Under Management of the fund is 2.59 lakh crores.

Both these managers have been alleged to indulge in front running.

The seven funds for which the fund house changed the managers are Axis Arbitrage Fund, Axis Value Fund, Axis Banking ETF, Axis Technology ETF, Axis Consumption ETF, Axis Quant Fund, and Axis Nifty ETF.

According to Axis Mutual Fund‘s statement on Twitter, “Axis AMC has been conducting a suo moto investigation over the last two months (since February 2022). The AMC has used reputed external advisors to aid the investigation as part of the process, two fund managers have been suspended pending investigation of potential irregularities. We take compliance with applicable legal/regulatory requirements seriously, and have zero tolerance for any instance of non-compliance. The media is requested not to give credence to market speculation and idle gossip, which are baseless and we strongly refute the same.”

Updates about the new fund managers:

• Axis Arbitrage fund- Ashish Naik, Sachin Jain and Devang Shah
• Axis Banking ETF, Axis consumption ETF, Axis Nifty ETF, Axis Quant Fund- Ashish Naik
• Axis Technology ETF and Axis Value Fund: Jinesh Gopani

What is front running? Is front running illegal?

Also known as tailgating, front running is when brokers misuse any information related to investors’ orders for their personal benefit. Since brokers can access all the private information about crucial transactions going to take place in future, it is possible that the information may be misused.

For example: When mutual funds make exorbitant orders, a few managers happen to purchase the same shares personally before the big purchase by mutual funds as the prices are expected to grow up in future. When brokers or managers indulge in such activities for personal advantages, it is called front running.

According to the Securities Exchange Board Of India, it is a manipulative activity that is unethical and illegal. Since confidential data is misused for personal benefits, several penalties have been imposed on fund houses and managers by SEBI in the past.

How does front running work?

Let’s say a broker receives a huge order from one of his clients to buy 5,00,000 shares of ABC Limited. Due to this huge buying of shares, the prices of the company’s shares are expected to jump in future. Now, a broker decides to buy himself 1,000 shares of the same company, i.e. ABC limited.

The broker buys 1,000 shares at Rs 100 each before initiating the client’s order. Then, he makes the transaction for his client. After a huge buying of 5,00,000 shares, the prices of the shares go up to Rs 250 per share. The broker then sells his 1,000 shares at Rs 250 each and makes a profit of Rs 1,50,000.

In such scenarios, the information not freely available to the public is used by the broker for his personal gains. Hence, such activities are unethical and illegal.

What is the difference between front running and insider trading?

Though used interchangeably sometimes, these terms have a thin difference between them. Insider trading is when someone, a broker or manager, uses non-public information from the company or even discloses that information.

However, in the front running, brokers or managers use their client’s data and make a personal benefit out of it. When they see a big order being made by their clients, they tend to buy stocks prior to executing the order. Hence, it is like running in front of the client to buy the stocks first to make profits or gains.

What should investors do?

Experts say that funds are managed by multiple managers, and investors need not panic at the moment. Investors should wait for statements from the fund house before making any modifications to their investment portfolios.

And, as most of the schemes were ETFs, the investors should not worry about changing their portfolios. Hence, the change shouldn’t be of much concern to investors.