Can I invest in MNC Funds? Review: UTI MNC Fund vs ABSL MNC Fund

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MNC mutual funds invest a major portion of their portfolio in multinational corporations (MNCs). Since MNCs typically run efficient businesses, they are good picks in an individuals stock portfolio. However, does it make sense to invest in a mutual fund that predominantly in MNC stocks? Let us find out. There are three mutual funds with an MNC theme: UTI MNC Fund, ABSL MNC FUnd and SBI Global MNC Fund. In this article let us compare their performance with Nifty 50, Nifty  MNC index and with each other.

Summary of the MNC funds available. ABSL MNC fund was launched in April 1994, currently has an AUM of 3492 crores (all options and plans combined) and an expense ratio of 1.2% (direct plan). UTI MNC fund was launched in Jul 1998, currently has an AUM of 2092 crores and an expense ratio of 1.43% (direct plan). Much of the current AUM would be in regular plans. There are two reasons for this: good commissions for the regular plans and lack of exposure among direct investors. SBI Magnum Global fund was launched in Sep 1994, currently has an AUM of 3486 crores and an expense ratio of 1.42% (direct plan). However, this fund was a mid cap fund before 15th May 2018.

Caveats and warning: In this article, I have assumed that the UTI and ABSL MNC funds have not changed their investment strategy since inception as I could not find any such evidence. In case, this assumption is incorrect, kindly let me know with proof.  Investors should understand that investment in thematic funds come with greater risk than diversified fund even if past volatility is lower (as in this case). This is because thematic funds tend to invest in stocks of a particular type and uncommon factors like war, sanctions, regulations etc can affect them more than other diversified funds. Therefore, they have invisible or hidden risks and it is important to keep this in mind when evaluating them.

Definition of MNC Companies

SBI Magnum Global defines  MNC Companies as those with a major shareholding by a foreign entity or Indian companies having over 50% turnover from regions outside India or Foreign listed Companies and 80% of the portfolio will have such stocks. Many MNC companies have good ROE, ROCE and an excellent track record of governance. This makes them (typically) less volatile than other stocks. There is however a difference between picking and choosing MNC stocks for an individual’s direct equity portfolio and investing in an MNC fund.

Can I invest in MNC Funds? Review: UTI MNC Fund vs ABSL MNC Fund

NIfty MNC Index Constitution

This is a 15 stock index with the following eligibility criteria

 i. Companies must rank within the top 800 by average full market capitalisation and average daily turnover for the last six months..
ii. Companies should have a foreign shareholding of over 50%.
iii. The company’s trading frequency should be at least 90% in the last six months.
iv. The company should have a listing history of 6 months (3 for IPOs)
v. Final selection of 15 companies shall be done based on the free-float market capitalization of the companies.

As per current factsheet (linked above), these are the top 10 stocks with weights

  1. Maruti Suzuki India Ltd. 10.01
  2. Hindustan Unilever Ltd. 9.99
  3. Britannia Industries Ltd. 9.78
  4. Vedanta Ltd. 9.45
  5. Ambuja Cements Ltd. 4.86
  6. Colgate Palmolive (India) Ltd. 4.72
  7. United Spirits Ltd. 4.64
  8. Bosch Ltd. 4.52
  9. Ashok Leyland Ltd. 3.69
  10. Procter & Gamble Hygiene & Health Care Ltd. 2.87

All three MNC funds currently hold more than twice the number of stocks in this index. This is good for volatility (lower) and may or may not be good for returns.

Nifty 50 vs Nifty MNC (5 years)

First, let us consider (as usual!) every possible 5 and 3 year period for comparing returns and risk (standard deviation). If you wish to know more about standard deviation, you can check out this video.

What is standard deviation? Measuring Investment Risk Part 1

Nifty MNC vs Nifty 50 rolling return and risk for five years

Nifty 50 vs Nifty MNC (3 years)

Nifty MNC vs Nifty 50 rolling return and risk for three years

Nifty MNC has outperformed Nifty 50 at typically lower or comparable risk. Now let us find out how the MNC funds have fared against both these indices.

UTI MNC fund vs Nifty MNC vs Nifty 50

Three years

UTI MNC fund vs Nifty MNC vs Nifty 50 three year comparison

Five years

UTI MNC fund vs Nifty MNC vs Nifty 50 five year comparison

ABSL MNC fund vs Nifty MNC vs Nifty 50

Three years

ABSL MNC fund vs Nifty MNC vs Nifty 50 three year comparison

Five years

ABSL MNC fund vs Nifty MNC vs Nifty 50 five year comparison

We shall not consider SBI magnum global as it does not have a long enough history as an MNC themed fund.

UTI MNC Fund vs ABSL MNC Fund

Three years

UTI MNC Fund vs ABSL MNC Fund three year comparison

Five years

UTI MNC Fund vs ABSL MNC Fund five year comparison

There is not much difference between the two funds. ABSL MNC has produced a bit more return at a bit more risk. Over 5 years both funds have comfortably beat Nifty 50 and have just about managed to keep pace with or do better than Nifty MNC Index. However, the three-year data is a bit concerning.

While Nifty MNC index has managed to just stay above Nifty 50 when 3Y returns are considered since ~ Sep 2017. However, both funds have underperformed Nifty MNC. Only ABSL MNC Fund has outperformed NIfty 50 in this period. Too early to say anything based on this, but such periods can be quite frustrating for an investor.

Between ABSL MNC and UTI MNC, ABSL MNC fund is the winner but a little more volatility is the price to pay for excess returns

Video Version

Can I invest in MNC Funds? UTI MNC Fund vs ABSL MNC Fund

Can we invest in MNC funds?

I just talked about “small exposure syndrome” (see video below) where investors have a little exposure of this and a little exposure of that and so on until their portfolio is a mess. So if you are thinking, “maybe I should have a little exposure to MNC funds” after reading this, then please do not!! I can only see three meaningful options here:

  1. Buy MNC stocks not funds. You can simply choose MNC stocks that part of both NIfty MNC and NIfty low volatility 30 (or 50) or from Nifty 100 Momentum, Low Volatility Stock Screener for March 2019. However, the allocation to MNCs and when to buy/sell will be up to you. However some large cap MNC stocks are reasonably safe long term bets either in the form of growth or regular dividends or both.
  2. Use MNC funds instead of large caps. This means significant exposure and reasoning that these funds have comparable volatility to NIfty 50 with a potential to beat it.
  3. Stay away from MNC funds and stick to diversified funds.

My feeling is that it would be better for an investor to buy MNC stocks separately (option 1) as it would result in better control, flexibility and lower expenses. Option 2 is not all unreasonable but if the fund underperforms Nifty for 2-3 years, it would be a frustrating, expensive proposition in addition to the concentration risk.

Are you suffering from Small Exposure Investor Syndrome?

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.

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