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Invest in MNC funds
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While these thematic funds have given good returns in the past, investors need to be aware of the risks they carry.
The MNC advantage
By investing in an MNC fund, can gain exposure to well-established companies with proven business models that have been tested in several countries.
These companies have weathered the competition in many markets globally and have gained from the experience. Their business models help mitigate the risk.
Most MNC companies offer goods and services of a high quality and their products are technologically superior as they have access to their parents' know-how. They enjoy a good brand image. Many of them are led by expats, who have worked in several countries and bring a lot of experience to the job.
All these factors give these companies a sustainable competitive advantage that translates into high market shares.
While catering to the domestic market, MNCs develop an ecosystem of suppliers and vendors. Then, taking advantage of cost efficiencies, they foray into export markets. This gives a multi-year fillip to their earnings.
MNCs generally adhere to high standards of corporate governance. I have not come across instances of aggressive accounting among these stocks. Since many of them are cash cows, they tend to pay dividends regularly. Their books are usually not laden with debt.
MNC funds have the ability to give sound risk-adjusted returns. The beta of UTI MNC Fund is a relatively low 4.56, while its standard deviation is only 11% (beta and SD are measures of risk). These funds also tend to weather downturns well.
Disadvantages and risks
A key handicap that managers of MNC funds have to deal with is the limited universe of stocks available to them. As the economy recovers, the banking and financial services sector is expected to do well, but very few MNC stocks are available within this space.
The paucity of listed MNC stocks also gives rise to the risk of stock and sector concentration in these funds.
MNC fund investors will also have to contend with the valuation risk. Being cash rich and belonging to sectors like FMCG, most MNC stocks are currently trading at high valuations. Invest in these only through SIPs and with an investment horizon of at least five years.
Duplication is another issue. The diversified equity funds in your portfolio may already have many of these stocks. Investing separately in MNC funds may result in duplication.
The issue of high royalty payment to parents also crops up from time to time in the case of these stocks. High royalty payments could affect the earnings of these companies in the short term, though the markets won't pay much attention to the issue if their sales volumes and exports pick up.
What should you do?
MNC funds are better suited to volatile and depressed markets. "In rising markets, you should bet more on growth-oriented funds, however, points out that these funds have the potential to offer sound risk-adjusted returns over a five-year horizon. Remember, these are thematic funds that are riskier than diversified funds.
If you invest in them, limit the exposure to 10-15% of your equity portfolio.
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