Unravelling the underperformance of Axis Mutual Fund

In the dynamic world of mutual funds, Axis Mutual Fund found itself in turbulent waters post-Covid, delivering underwhelming performances across its diverse schemes. This article investigates the reasons behind Axis MF’s lagging returns, exploring a blend of market shifts, investment strategies, and a shocking front-running scandal that rocked the foundation of the fund.

The Growth Dilemma

For years, Axis Mutual Fund stood out for its growth-oriented strategy, investing in fast-growing companies, even when they were pricier. From 2017 to 2020, during the growth era, the fund consistently outperformed its peers, securing a top-quartile position. However, as the post-Covid landscape witnessed a resurgence of value investing, Axis MF struggled to adapt, resulting in a noticeable underperformance.

Tables Illustrating Underperformance:

The Growth Approach’s Dwindling Fortunes

Axis Mutual Fund’s growth-oriented approach, prioritizing consistent revenue and profit growth overvaluations, served them well during the growth era. However, this strategy fell out of favour in the last two years, as growth companies faced challenges amidst rising interest rates and concerns over an economic slowdown. The fund’s commitment to this approach, despite the changing market sentiment, resulted in an underwhelming performance.

A Bold Strategy and Its Repercussions

Known for bold calls and an unwavering growth strategy, Axis MF faced headwinds when the market turned cautious about valuations. While investment strategies often have their moments, Axis’s insistence on its growth approach during a period favouring value stocks created a mismatch, leading to the fund’s lagging performance. The question arises: will the growth strategy regain favour, or is it time for a strategic shift?

The Resurgence of Value

Jinesh Gopani, head of equity at Axis MF, pointed to the extreme polarisation in stock valuations during the pandemic’s initial phase. A surge in low-quality stocks, fueled by government liquidity injections, inflation, and rate hikes, further marginalized high-quality stocks. This shift in market dynamics compounded Axis MF’s challenges, particularly for its growth-centric funds.

The Front-Running Scandal

Compounding Axis MF’s struggles, the fund unearthed irregularities in February 2022, revealing allegations of front-running involving some fund managers. This illegal practice involved passing exclusive stock information to brokers for personal gains, impacting the fund’s buying and selling decisions. The scandal only surfaced in May 2022, after three months of clandestine activities, dealing a severe blow to Axis MF’s reputation.

Unraveling the Scandal

In August 2022, the Income Tax department seized unaccounted cash deposits of Rs 55 crore from Viresh Joshi, an Axis fund manager embroiled in the scandal. Joshi’s involvement extended beyond brokers, reaching middlemen and individuals in foreign jurisdictions. The revelation exposed not only ethical breaches but also the potential influence of these illicit activities on the fund’s overall performance.

Conclusion

Axis Mutual Fund’s underperformance can be attributed to a confluence of factors, including an unwavering growth strategy in a value-oriented market, a bold approach during a cautious period, and the damaging front-running scandal. As Axis MF navigates these challenges, the road to recovery involves not only adapting to market shifts but also addressing internal governance issues and rebuilding investor trust. The tale of Axis MF serves as a cautionary reminder of the importance of aligning investment strategies with prevailing market dynamics and upholding ethical standards in the financial industry.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.