MNC funds suit investors looking for steady compounder: Should you invest?

A quality-oriented flexi- or multi-cap can play a similar role in your equity portfolio

While multinational corporation funds or MNC funds have been around for several years, HDFC Mutual Fund’s recent new fund offer has brought the spotlight back to this thematic category. While the category, on average, has beaten the Nifty50 Total Return Index over the 10-year period, it has lagged behind over shorter horizons.

Fund houses like SBI, UTI, Aditya Birla Sun Life, and ICICI Prudential have active funds in the category while Kotak offers an exchange-traded fund based on the Nifty MNC Index. Altogether fund houses manage ~12,315 crore under this category.

Where do they invest?

MNC funds invest in stocks of companies that have high foreign promoter holdings, usually above 50 per cent. The Nifty MNC index, the benchmark for these schemes, consists of 30 MNC stocks, selected on the basis of free-float market capitalisation.

MNC companies are spread across sectors such as fast-moving consumer goods (FMCG), auto and auto components, healthcare, capital goods, metal and mining, and information technology. Since these companies are of varied sizes, investors get exposure to a basket of large-cap, mid-cap and small-cap stocks upon investing in these funds.

Fund managers differ in their strategies. Some run compact portfolios. SBI Magnum Global Fund, for instance, has only 20 stocks. ICICI Prudential MNC Fund, on the other hand, follows a more diversified strategy with 57 stocks.

Bright prospects, strong fundamentals

With India increasingly being seen as an alternative manufacturing destination to China, many MNC parents may decide to expand their manufacturing bases in India to cater to their global markets. This could expedite the growth of their Indian arms. These funds, thus, have the potential to act as consistent wealth compounders for long-term investors.

The MNC pack comprises mostly of high-quality businesses. They have business models that have been tested across various markets globally. Their parents invest significant amounts in research. This leads to new products being launched periodically, which spurs growth. These companies also have high corporate governance standards and robust balance sheets.

“MNC funds are usually seen as a proxy for 'quality-oriented’ investing. They invest in established global companies that have well-known brands, low debt, and a proven track record across market cycles. Usually, these funds are characterised by lower volatility, reasonable returns over the long run, and good relative performance in weak market environments,” says Arun Kumar, vice president and head of research, FundsIndia.

High valuations, limited universe

These thematic bets have their share of downsides, too. Most MNC stocks tend to trade at rich valuations.

“The number of stocks within the MNC universe is limited, which makes it difficult for fund managers to diversify adequately,” says Ravi Kumar TV, founder, Gaining Ground Investment Services. He adds that like any other thematic offering these funds too may underperform in certain years.

Occasionally, the parent entities of these companies have, in the past, jolted minority shareholders by demanding royalties to meet their significant research and development (R&D) expenses. There have also been times when Indian regulators have clamped down on certain products of these companies. Such actions have led to short-term hits to their profitability.

Alternatives available

Instead of investing in an MNC fund, a long-term investor may opt for a flexi-cap or a multi-cap fund. “A well-managed, diversified, quality-oriented flexi-cap fund can provide a similar portfolio construct and risk-return outcomes. However, the fund manager would have greater flexibility in terms of access to a broader universe of stocks. He would be able to diversify across more sectors (MNC funds tend to be heavy on defensive sectors such as consumption, IT, pharma etc and low on financials),” says Arun Kumar.

Who should invest?

According to Ravi Kumar, investors who understand the MNC theme and have a moderate risk appetite may consider these funds with a three to five-year horizon.

Bharat Phatak, director, Scripbox adds that only investors who have the ability, inclination and expertise to monitor their prospects should invest in MNC funds.
 

First-time investors, according to Ravi Kumar, should stick to diversified-equity funds. “Cap your thematic exposure to less than 20 per cent, and to MNC funds to 10 per cent, of your overall equity portfolio,” says Arun Kumar.