These thematic funds have delivered in the past, but should you invest in them?

Mutual fund schemes investing in shares of multinational companies have fallen less in 2020 so far, compared to large-cap equity funds. MNC funds, as they are popularly known, have done well so far because of the favourable sectoral exposures and investors’ preference for some of the high-quality stocks held by these schemes. Despite their robust long-term track record, investors must not take a blind plunge to buy these MNC schemes given their relatively narrow mandate.

Why have MNC funds outperformed?

According to Value Research, MNC funds as a category lost 5.11 per cent in 2020 as compared to a 13.53 per cent decline posted by the Nifty 50 TRI. MNC funds use the Nifty MNC as the. The index has fallen 4 per cent since January 1.

The index has 50 per cent allocation to consumer goods, followed by automobile and pharmaceuticals with 13 per cent and 8 per cent weightage. The index has less than one per cent allocation to financial services as compared to 33.33 per cent weight in the Nifty 50 index. The portfolios of MNC funds reveal that three out of four MNC funds have healthcare and FMCG sector as the top allocations. Both these segments, especially the latter, have done quite well in these volatile markets.

The other reason behind the surprising performance of MNC funds is that they also have negligible or nil exposure to the troubled financial services space compared to a typical diversified equity fund. For the month ended May 31, 2020, multi-cap funds, on an average, have 25 per cent money invested in financial services stocks, according to Value Research. “Lower exposure to financials is one of the factors which has helped in the MNC fund’s performance,” says Anish Tawakley, Senior Fund Manager, ICICI Prudential AMC. The bank Nifty has lost 30 per cent so far in this year.

Changing investors’ preference

As markets turned turtle in anticipation of the likely impact of the COVID lockdown, investors took to defensive stocks. “Investors prefer to stick to consumer staples and pharmaceutical names where the demand should be stable. Sectors such as financials and real estate are avoided,” says Ravi Kumar TV, founder of Gaining Ground Investment Services. The best of the names in defensive sectors have MNC parentage.

“MNC typically tend to be strong companies with robust balance sheets and operations across several countries,” says Tawakley. There aren’t  many heavily indebted mid-sized names in the MNC space. With fairly large-scale operations, sound cashflows and global presence, funds invest in these companies despite their high valuations.

Fading returns

Though the MNC funds have done well this year, their performance in recent years has been modest. Large cap equity funds delivered 1.1 and 10.53 per cent for the calendar years 2018 and 2019 when the markets were polarized. MNC funds delivered -4 per cent and 3.69 per cent, respectively in these years.

“MNC shares tend to recover quickly post market corrections, as the investors find prices attractive,” observes Deepak Chhabria, founder and managing director of Axiom Financial Services.

Should you invest?

Since most of the MNC stocks generally enjoy premium valuations, investors have to be very careful while investing in this thematic offering. It’s tempting to invest in funds that come with a good past performance track record. But, by then, typically, the valuations become overstretched. “Savvy investors should consider investments in this theme only after a sharp correction in equity markets,” says Chhabria. “Average retail investors may find it difficult to get the timing right, and hence they are better off investing in large cap or multi cap funds,” he adds.

You can add on during sharp falls, if any. But do not forget to book profits during major rallies.