How mutual fund investors can minimize the impact of early investments

The Mutual Funds Association of India (AMFI) recently laid down guidelines for fraudulent and pre-selling transactions. The AMFI move, which comes nearly a month after SEBI’s push in response to allegations of pre-selling against Quantitative MFIt is an attempt to tighten regulations to achieve greater transparency. Despite the proactive role of the market regulator, mutual fund investors are always prone to such market abuse tactics.

The Demon of Mutual Funds cutting-edge is not new to the market and has often plagued investors due to its negative repercussions. In addition to Quant MF, other AMCs such as Axis Mutual FundHDFC Mutual Fund and even LIC have come under scrutiny over allegations of front-selling activities. As repeated instances of front-selling compel investors to remain vigilant and take precautionary measures, let us understand how they can protect their portfolios from the effects of this practice.

What is front running?

Front-running is a bad market practice that is used by insiders who use their prior knowledge of pending orders to buy or sell stocks or other assets for their own benefit. For example, if a broker or officer of a mutual fund house leaks information about the execution of a pre-planned trade, the individuals may use the information to create pre-positions in the trade for their own benefit. The information leak can cause great harm to other mutual fund investors in the long run.

How to protect portfolios against premature investments?

While it is difficult to control cases of precocity, certain precautionary measures can help investors minimize the impact of such cases on their investments. Market experts advise investors to diversify their portfolios, stay alert and opt for measures such as passive investing.

Diversification

Market experts believe that diverse Investments can help people with long- or short-term investment strategies absorb market shocks caused by early investments.

“Spread your investments across asset classes and sectors. This reduces concentration risk and makes it harder for leaders to target specific stocks,” said Amit Goel, co-founder and chief global strategist at Pace 360.

Investors can also opt for a broad spectrum of sectors and geographies to minimise their exposure to volatility in any one market, believes Tarun Singh, Founder and Managing Director, Highbrow Securities.

Vigilant surveillance

Staying abreast of market developments and regularly reviewing investment portfolios enables investors to spot market malpractices before it is too late. “Regularly reviewing fund performance for unusual patterns could help investors spot those who are ahead of the curve,” said Narinder Wadhwa, CEO of SKI Capital, while stressing the importance of choosing a fund manager with a strong compliance and governance system.

“While early investing can be a major concern for investors and their investments, it is important to maintain a balanced perspective. By staying informed about market developments, conducting thorough due diligence on fund managers and diversifying investments, investors can mitigate the risks associated with this practice,” said Heena Arora Agarwal, Founding Partner and Managing Director, FundVice.

Passive management

Passive investing ensures consistent wealth generation over a longer period. Unlike traditional mutual funds, which aim to outperform the market or a specific market index, a passive investment ensures consistent wealth generation over a longer period. passive index It ideally reflects the performance of a market index. Sticking to passive investment tools like index funds, ETFs, etc., will likely reduce the chances of falling into the trap of those who are ahead of others, said Tarun Singh.

When mutual funds face accusations of being ahead of the curve

In the event that the investment fund in which investors have invested money faces accusations of vanguardNarinder Wadhwa advises them to review the fund manager’s response to the allegations and keep a close eye on SEBI’s action.

“Investigate the allegations and gather information from reliable sources. Pay attention to the evidence presented and the response from the financial institution,” Goel said.