The returns of MNC funds, which invest in multi-national companies, have always stood out compared to other equity fund categories. Despite being thematic funds, their returns have been consistent across market cycles. Other sector or thematic funds like banking, pharma and technology see high volatility in returns.
In the past three months, markets have been volatile but MNC funds have contained the downside. These funds corrected 7.6% in three months to 3 June, according to data from Value Research. All other equity funds categories, except pharma (which gave 14% returns), have seen a higher fall in returns than MNC funds.
Over the long term—10 years—the category has given 13.5% returns, higher than all other categories. “MNCs where these funds invest have better corporate governance standard, strong brand identity and they are cash rich. Their financials are better, and investors consider them as quality stocks. Due to all this, their returns have been consistent," said Kaustubh Belapurkar, director, fund research, Morningstar Investment Advisor India.
Investors usually look for similar attributes for funds that they want to keep at the core of their portfolio. They want funds that are consistent, protect the downside, and are well-diversified.
So, should investors keep MNC funds in their core portfolios even though they are thematic?
Financial planners feel that investors with large portfolios can keep MNC funds in their core portfolios. “When a portfolio grows, an investor would need to add more funds to the core portfolio. MNC funds can complement diversified equity funds. Investors should first invest in a large-cap, then in a large-and-mid-cap fund, and then look at the MNC fund category," said Arnav Pandya, a financial planner and founder of Moneyeduschool, an Ahmedabad-based financial literacy initiative.
According to Pandya, since the Securities and Exchange Board of India (Sebi) has done the mutual fund recategorization, fund managers have a defined universe of stocks where they can invest. If an investor adds another large-cap or large-and-mid-cap fund to the existing portfolio, there could be duplication in the underlying stocks of these funds. “MNC funds can help in better diversification as they don’t have to invest based on the market caps of stocks," said Pandya.
There are only four MNC funds as of now—Adita Birla MNC, UTI MNC, SBI Magnum Global and ICICI Prudential MNC. Most of these funds have a higher exposure to the consumer goods and healthcare sectors, which have done well recently and that has helped the category contain the downside. According to Sebi regulations, these funds need to have at least 80% of their investments in MNCs, while the remaining 20% can be invested in other instruments.
If you already have a core portfolio in place, you can also add MNC funds as a satellite fund, said Belapurkar. Satellite funds, typically, include sector and thematic schemes. As a thumb rule, the satellite portfolio should be 15% of the overall equity portfolio, and each investment should be 5% or less.