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MNC Funds

What is your view on MNC funds at this point of time? I feel this could be the ideal time because last few years these companies were out of favour.

What is your view on MNC funds at this point of time? I feel this could be the ideal time because last few years these companies were out of favour.
-Daljit Singh

There is no guarantee that MNC stocks would do well in future just because they have remained out of favour in the past few years. And to time your investment based on such assumptions is just about the worst thing you could do at any point of time. Instead, investing in a good diversified equity fund on a regular basis would be a better strategy.

MNC funds are specialised diversified equity funds. The only difference is that their investment universe comprises of only those companies where a foreign company holds a majority stake. Diversified equity funds also invest in MNC stocks along with domestic company stocks. You must realise that MNC funds are not sectoral funds. The logic for a sectoral fund is that there are times when a sector as a whole does better than the rest of the market. Once upon a time, there was some logic in having an MNC fund as these companies were better managed, had better corporate governance and general made high dividend payouts. Today there are many domestic companies that share the same characteristics.

Since most of MNC companies are in the pharma, FMCG and basic/engineering sectors, these sectors account for more than half of MNC funds' portfolio. Currently, top picks of MNC funds include Aventis Pharma and Siemens. This year (2004), in ten months, the three MNC funds have had a good run. Kotak MNC is leading the pack with a gain of 11.11 per cent, followed by UTI MNC (up 8.35 per cent). Birla MNC, however, has just gained 3.45 per cent due to its higher exposure in FMCG MNC stocks, whose prices have, in fact, declined as compared to smart gains made my MNC pharma stocks. Consider this: While BSE FMCG Index is down 18 per cent, the BSE Healthcare Index is up over 4 per cent in the same period. Both Kotak MNC and UTI MNC's top sector has been pharma, accounting for 27 per cent in each, helping them in taking a lead over Birla MNC.

MNC Funds: Performance
  2004*  2003  2002  2001  2000
Kotak MNC 11.11 98.28 3.72 -20.74 -
UTI MNC 8.35 80.19 33.1 -13.88 -19.34
Birla MNC 3.45 93.8 9.76 -12.16 -23.5
*till October 31, 2004 in per cent

The outlook for MNC pharma stocks is positive as post-2005 the whole market dynamics will change since pharma sector will have to adhere to product patent regime. While MNC pharma companies will have the advantage of introducing their parent products in the domestic markets, the Indian companies will have to concentrate on R&D to remain competitive.

Despite all these, we would still advice you go for a diversified equity fund with a long-term investment horizon rather than betting solely on MNC funds. Why risk your investment if you can take advantage of MNC stocks along with the diverse domestic company stocks by investing in diversified equity funds?

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