Axis Mutual Funds Scam – Should you exit your funds?

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Axis Mutual Funds Scam – What should investors do now?

Yesterday there was news in a leading newspaper that Axis Mutual Funds has asked 2 of the fund managers to go on leave. Something was suspected and a lot of rumors’ floating on media. Axis Mutual Fund has issued a clarification indicating 2 of the fund managers are suspended on the issue of irregularities. As per leading news paper, one of the fund manager is enjoying lavish life style and driving luxurious sports car. This is creating some turbulence in the mutual fund industry. In this article we would indicate details about Axis Mutual Fund Scam, What exactly happened and whether investors should redeem their mutual fund schemes at this point of time or not.

Also Read: How to protect your portfolio from Mutual Fund Scams?

About this Axis Mutual Fund Scam

Axis Mutual Fund is a joint venture between Axis Bank and Schroders.

Axis MF has found irregularities in Feb-2022 and have initially asked the 2 fund managers to go on leave. Later, upon several rumors floating they have issued a clarification saying 2 fund managers have done irregularities and have been suspended. Here is the note issued by the Axis Mutual Fund.

What happened in Axis Mutual Fund Scam?

Axis Mutual fund currently manages over Rs 2.6 Lac Crores of AUM in the mutual fund industry till end of Apr-22.

There were allegations in media indicating Axis Mutual Fund scam of Rs 1,000 Crores involving 3 of the senior officials. However, Axis Mutual Fund clarified over note that there are only 2 officials involved in irregularities without quantifying anything. Here are the details of irregularities done by them.

These 2 fund managers are involved in allegations of front running.

Front running is when the broker / fund manager has exclusive information about the stocks being purchased or sold in large quantities and trade them for their personal benefit. Such front running is illegal in India.

Front Running – Explained with an example

The mutual fund house would analyze several stocks and plans to purchase or sell them on a particular day or particular week across their mutual fund portfolios. However, when they buy or sell such stocks in large quantities, there could be price action I.e.. Stock prices can go up or go down. Fund managers would have this information handy well ahead of time. What if they know this and use for their personal benefit? Below are sample scenarios on how they can get benefitted by having such sensitive information up front.

1) These individuals or brokers (to whom they have passed the info) can purchase the stocks well ahead. E.g. If mutual fund scheme is planning to buy on Monday, these individuals/brokers can purchase the stocks couple of days ahead of time and sell them on Monday after price is increased.

2) They can short the stocks. E.g. If they know the mutual fund house is going to sell the stocks and stock price might fell, these individuals can short i.e. Sell upfront and purchase after the price has fallen.

3) Above 2 strategies can be implemented in futures and options and gain a significant amount of money.

In the Axis MF scam probe it is found that scenario 1 is implemented i.e. fund manager would pass the info to brokers. They would purchase them upfront and on the day when MF purchases they would sell at higher prices and make money.  We understand that in return fund manager got kickbacks from brokers.

As per one of the leading news paper article published couple of hours back, one of the large institutional broker commented that they suspected life style of one of the alleged fund manager who was driving a luxury sports car.

Who are the fund managers involved in these irregularities?

Mr. Viresh Joshi – Head Trader and Fund Manager – Handling 5 mutual funds

Mr. Deepak Agarwal – Equity Research Analyst and Fund Manager – Handling 3 funds.

List of funds these fund managers are managing

Here are the funds that these fund managers are managing.

1) Axis Arbitrage Fund

2) Axis Banking ETF

3) Axis Consumption ETF

4) Axis Nifty ETF

5) Axis Quant Fund

6) Axis Technology ETF

7) Axis Value Fund

Is there any loss to Axis MF mutual fund schemes with these irregularities?

With the available information, we know that it is used for personal benefit by these fund managers and not at institutional level.

If these fund managers have solely benefitted from such illegal practice, then no damage to the mutual fund schemes. However, assume that such sensitive info is shared across other individuals and everyone else benefitted except the mutual fund scheme, then it is a serious problem. This might not be problem with index funds or large cap funds as the volume is very high. The irregularities can happen in smallcap stocks where the volume could be low. Brokers can purchase upfront and sell them on the day when MF house is purchasing them and make money.

What precautions mutual fund investors take to avoid such scenarios?

There are many experts who keep indicating that one should not invest in too many funds and stick to only 1-2 funds.

I am contrarian to this concept from the beginning of starting this blog and keep indicating that one should always invest in 5 to 7 mutual funds.

One should always diversify their portfolio across mutual fund schemes between AMCs, across market caps (Largecap, midcap, smallcap, balanced etc.) and between equity and debt segment.

If you observe, we provide Top 10 mutual funds every year, which has such diversified portfolio. If you have invested in such diversified portfolio, even in case of scam or scandals, your portfolio might have a smaller impact. E.g. if you invested in 7 mutual fund schemes, assume one fund house completely is bankrupt, your portfolio would fall by 15% only.

Should you exit Axis Mutual Fund Schemes?

As per Axis MF note, it indicated that they have found these irregularities in Feb-2022 and after investigation it has suspended 2 fund managers. In the note it says after 2 months of investigation, whereas it is 4th month running now. The note also does not explicitly indicate the depth of damage of the irregularities, but they have washed away their hands indicating they have suspended the fund managers and one should not believe on rumors’ on media. It is the integrity / corporate governance issue. We do not know the extent of damage being done. For funds invested in index or largecap funds, the damage would be zero or low. However in case these funds have invested in smallcap funds with low volume, definitely the stock prices would have fallen.

At this point of time, Axis mutual fund investors can do little or nothing. Stock markets have taken beating in the recent times and NAV has already fallen. If Axis MF investors rush for redemptions, it would put pressure for new fund manager to sell stocks at existing prices and create some more panic. I would recommend Axis MF investors to continue their holdings till we get clear picture and take a final call. If you have SIPs, you can pause them or divert such investments to other funds till we get clarity.

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