Should You Invest In MNC Funds?

If you are looking to invest in a thematic fund, you may consider MNC funds.

- Sudipta Mitu

Though this theme has underperformed over the past year--the Nifty MNC index has given a return of -8.39 per cent compared to the Nifty 50’s 9.38 per cent return--the theme has a good long-term track record. The Nifty MNC index has given an annualised return of 11.84 per cent over the past five years while the funds in this category have given an average annualised return of 13.54 per cent over the same period.

Strengths of this category: The greatest advantage of investing in MNC funds is that you get to own quality companies in the fund portfolio. The management of MNCs tends to be professional. These companies also have sound corporate governance practices, with an emphasis on maximising shareholder value.

Many MNCs are market leaders in their categories, owing to their strong brands, technological leadership, and the strength of their intellectual property. The global parents of these companies have a large bouquet of innovative products, which they can introduce into the Indian market at a steady pace, as and when this market is ready for them. This gives MNCs an edge over their Indian rivals, which may not have a ready pipeline of innovative products.

MNCs also tend to be good at making capital allocation decisions. Many Indian promoters have a tendency to diversify into unrelated areas. Such diversifications often do not work, and they cause wastage of capital. MNCs, on the other hand, tend to stay sharply focused on their areas of core competence.

Instead of wasting their surplus capital on poor-quality diversifications, MNCs tend to pay out dividends to their shareholders. Hence, the dividend payout ratios of these companies tend to be high.

Finally, since the companies in this space are of a high quality, they tend to be resilient during economic and market downturns. As a result, the portfolios of these funds tend to decline less when the market environment turns adverse.