With HDFC launching its MNC fund, we explore if such thematic funds should be a part of our portfolio
21-Mar-2023 •Chirag Madia
Thematic funds typically create a buzz when they perform well. But that's not the case with MNC (multinational corporations) funds.
At a time when multinational corporations, on average, have delivered negative returns, some of the prominent fund houses in India have either rolled out or are in the midst of launching their MNC funds.
For the uninitiated, HDFC Mutual Fund reportedly collected around Rs 350 crore by opening their MNC fund for public subscription recently, while IDFC Mutual Fund (now known as Bandhan Mutual Fund) have filed an offer document with Securities and Exchange Board of India (SEBI) for their MNC fund.
Overall, there are five such funds available to you at the moment, with a combined asset worth more than Rs 12,000 crore.
Since it's a reasonably-large thematic fund, we decided to assess the pros and cons of investing in an MNC fund.
What are MNC funds?
As the name suggests, these mutual funds invest in multinational corporations. These are companies that have business operations around the world.
Some prominent MNCs in India include Maruti Suzuki, Bata India, Nestle India and Honeywell Automation.
The shortcoming of MNC index
Most MNC funds' performances are compared to the MNC index.
The index is home to 30 MNC stocks, but roughly 75 per cent of the space is taken up by just three sectors:
Naturally, MNC funds also have a large exposure to these three sectors, given the MNC universe is not very large in size.
Therefore, people who invest in these funds are only exposed to a few sectors, which is avoidable. We'll explain the reason in the next section.
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Performance of MNC index vs flexi-cap fund
Before that, let's look at its short- and long-term trailing returns. (Trailing returns measure performance from one particular date to another).
Last year, the MNC funds reduced investors' money by 0.76 per cent.
Although their long-term performance is positive, they have lost out to an average flexi-cap fund over the last three, five and seven years.
Even on a five-year rolling returns basis - a performance metric that showcases an investment option's consistency - MNC funds have under-delivered an average flexi-cap fund 80 per cent of the time in the last three years.
Only over 10 years have MNC funds trumped an average flexi-cap fund (14.58 per cent vs 13.70 per cent). While this data seems encouraging, we still suggest you remain wary of thematic funds, for they are known to be temperamental.
Why? Going by past experience, every uptrend has an expiry date. Hence, as an investor, you'd need to have high levels of patience and a risk-taking appetite to go through the long periods of downturn associated with thematic funds.
Additionally, since the MNC index is exposed to only a few sectors - consumer staples, automobiles and capital goods, to name a few - your returns will be heavily affected by the ups and downs of these sectors.
What you should do
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