Enhance portfolio resilience by investing in MNC fund: What is on offer?

When the equity markets turn volatile, investors look for funds that can weather difficult times. MNC (multinational companies) funds are one such investment avenue. These schemes have diversified portfolios of companies having foreign promoters, which are listed in India.

However, in the last year ended March 27, 2024, these schemes have underperformed with 30.7 per cent return on average, compared to a 41 per cent return given by flexicap funds and 42.5 per cent given by largecap funds, according to Value Research. The question is whether these funds deserve your money.

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“During periods when domestic cyclicals tend to do very well, MNC names could see temporary periods of underperformance,” says Roshan Chutkey, senior fund manager, ICICI Prudential MNC Fund.

Adds Karthikraj Lakshmanan, fund manager–equity, UTI Asset Management Company: “MNC companies, especially consumer staples, have had lower growth in the last few years. Since valuations had already moved up, the overall returns have been lower.”

What is on offer?

MNC schemes have exposure to sectors such as fast-moving consumer goods (FMCG), capital goods, automobile, healthcare, chemicals, cement, information technology and financial services. The MNC space in India consists of large, mid and smallcap companies.

The performance of these funds is benchmarked against indices such as the Nifty MNC Total Return Index (TRI). The Nifty MNC index’s largest allocation (37.9 per cent) is to the FMCG sector.

Strong defensive plays

Equity schemes focused on MNC stocks can provide meaningful diversification. For example, flexicap schemes on average have allocated a quarter of their money to financial stocks, whereas MNC funds have allocated only 1-2 per cent of their money to financial services stocks. MNC funds have shares from consumer staples, healthcare and capital goods sector as their top three sectoral holdings. Hence, these funds can work as strong defensive plays if the financial market turns volatile.

“MNC names typically tend to be companies with strong parentage, robust export stories and typically rank high on corporate governance parameters. In effect, these companies tend to be among the strongest names within a broad market index,” says Chutkey.

Investing in MNC funds also provides investors with access to subsidiaries or associates of foreign companies having sizable turnover from overseas geographies. “Most of these companies have multiple avenues of growth, apart from their significant domestic stories,” adds Chutkey.

The foreign parentage can work to these companies’ advantage. “MNC funds invest in many large companies backed by global parents which have access to capital and technology. They have lower debt and are well governed,” says Parul Maheshwari, a certified financial planner.

Change in parent’s focus can pose risk

The high valuations of many MNC stocks, the possibility of changes in ownership structure, changes in royalty rates, or parent’s decision on whether to do business in India are some of the key risks.

“If the MNC parent decides to reduce focus on the Indian geography for any reason, then growth could be sub-par. This could in turn impact valuations. In some cases, the parent has sold partially at expensive valuations, or pared down their stake completely, and has turned the company into a non-MNC company,” says Lakshmanan.

What should you do?

Given the high-quality businesses in the MNC space, these funds have the potential to perform better in turbulent times. Investors who already have a large core equity portfolio may allocate some money to these schemes for diversification.

“These are thematic funds and hence could be a satellite allocation for investors. Though thematic, this fund category can be relatively safe as the businesses compound their earnings in a stable manner. The theme is also well-diversified,” says Lakshmanan.

He adds that over a longer period — calendar year 2007 to 2023 — the Nifty MNC TRI has outperformed the Nifty 50 TRI.

“Conservative investors with a five-year view can consider adding these funds. They can allocate up to 10 per cent of their equity portfolio to such schemes,” says Maheshwari.

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