How can front-running negatively impact mutual fund investors?
How can front-running negatively impact mutual fund investors?
Published 24th June 2024
What is front running?
Mutual fund houses buy and sell stocks through brokers, known as dealers.
If the dealer knows that a fund house is about to place a purchase/sell order and buys/sells the company’s shares beforehand, they can make money unfairly.
Here’s how
Dealer learns that a fund house is set to buy loads of Company A shares → Dealer buys Company A shares at Rs 100 → Fund house buys Company A shares. As a result, share price goes up to Rs 110 → Dealer sells the investment and pockets a 10% profit.
How it impacts investors
If the dealer buys a huge stake in Company A and drives up the price to Rs 102 before the fund house can even place an order, you, as the investor, will see your profits shrink.
Why are we talking about front-running today?
Quant Mutual Fund, the fastest-growing fund house in the country, is being investigated for alleged front-running.
Have front-running scandals impacted other fund houses, too?
Yes, a few fund houses have fallen foul in the past, with Axis Mutual Fund being the most high profile one.