3 min read.Updated: 09 Oct 2021, 10:25 PM ISTJintendra Agarwal
MNCs tend to be the least volatile, and thus less risky, compared to other thematic mutual funds because these companies are cash rich and can survive adverse times
They operate in several countries and can accordingly give your portfolio the necessary geographical diversification
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Foreign markets, foreign vacations, and foreign products have always held a certain kind of appeal. First, there is the expectation that it is something new that is currently not accessible in your country. Second, one assumes that the quality of the experience or product will be better than what is available in the domestic market. And, most importantly, it is the idea that only a few people can access foreign products and services. All good reasons. Now, let’s extend this to investing in foreign companies that produce such products and services. Wouldn’t they be a great investment opportunity?
Let’s start with defining multinational companies or MNCs as they popularly called. Multinational companies are companies that conduct business in their domestic market as well as in international markets. Since they operate in international markets, many MNCs are also listed on the stock exchanges of countries in which they conduct major operations. And this is how you can invest in MNC, i.e., by buying their stocks listed on your local stock exchange. However, it is well known that direct investing in stock markets can be a challenging task. As an individual investor, you need to do a great deal of research, regularly track your investments, and rein in your behavioural biases while making investment decisions. These challenges get amplified when it comes to investing in MNC stocks since the level of research required is even higher considering their global operations. An ideal alternative is to invest in MNC funds, i.e., mutual funds that invest in MNC stocks. MNC funds fall under the category of thematic funds and invest at least 80% of the corpus in MNC stocks.
Why invest in MNC funds?
Global stalwarts: MNCs are usually well-established global companies that have strong balance sheets, significant competitive advantage, and excellent research and development (R&D) capabilities. While the global parent provides MNCs with adequate financial cushion, it also provides access to enhanced technical know-how and innovative engineering and production processes that enable them to up their ante against competitors. Generally, MNCs have been around for a substantial period of time and as a result, have survived several market cycles. Their ability to survive these cycles is a testament to their resilience. Further, their experience across market cycles helps them to stay ahead of competition. Another factor contributing to their strength is good management and robust corporate governance practices that are embraced in order to operate across geographies.
Diversification: MNCs tend to be the least volatile, and thus less risky, compared to other thematic mutual funds because these companies are cash rich and can survive adverse times. They operate in several countries and can accordingly give your portfolio the necessary geographical diversification. Further, MNCs can be both cyclical and defensive – there are MNCs across several sectors such as Pharma, FMCG, IT and engineering and therefore, a MNC Fund can be well diversified as well.
Wealth Creation: MNCs are known to very stable when it comes to generating returns over long term and could fit the bill for a long-term investment perfectly. If your investment horizon is long-term, i.e., more than 5 years, volatility gets smoothened out and can potentially enhance the risk adjusted returns of your portfolio.
For an investment looking to invest in the MNC space, the optimal approach remains to go for an MNC based thematic mutual fund. Currently, an investor has the option of four funds from they can choose. If you are an investor who is comfortable with the portfolio having a fair share of foreign equity as a part of one’s portfolio then you may consider the MNC Fund from ICICI Prudential Mutual Fund. Here, as of August 2021, the portfolio has an exposure of 20% to international securities spread across sectors such as hardware, software, consumer non-durables and oil & petroleum products. Also, the fund has an outstanding track record when it comes to fund performance.
To conclude, MNC funds can be a good addition to your portfolio if you are looking to enhance the risk-adjusted returns of your portfolio through the stability and return generation potential of MNC stocks.
(CA Jintendra Agarwal of JNV Advisors LLP)
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