Should you invest in MNC funds?
Foreign markets, overseas vacations and foreign products have always had a certain appeal. First, it is expected to be something new that is currently not available in your country. Second, it is assumed that the quality of the experience or the product will be better than what is available in the domestic market. And, more importantly, is the idea that only a few people can access foreign products and services. All good reasons. Now, let’s extend that to investing in foreign companies that produce such products and services. Wouldn’t they be a great investment opportunity?
How to invest in multinational companies?
Let’s start by defining multinational corporations or multinationals as they commonly called them. Multinational enterprises are companies that operate in their home market as well as in international markets. As they operate in international markets, many multinationals are also listed on the stock exchanges of the countries in which they have significant operations. And this is how you can invest in MNC, that is, by buying their shares listed on your local stock exchange. However, it is well known that investing directly in the stock markets can be a difficult task. As an individual investor, you need to do a lot of research, regularly monitor your investments, and get your behavioral biases under control when making investment decisions. These challenges are magnified when it comes to investing in shares of multinationals, as the level of research required is even higher given their global operations. An ideal alternative is to invest in MNC funds, that is, 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 shares.
Why invest in multinational funds?
Global Pillars: Multinationals are typically well-established global companies with strong balance sheets, a strong competitive advantage, and excellent research and development (R&D) capabilities. While the global parent company provides multinationals with adequate financial cushion, it also provides access to improved technical know-how and innovative engineering and production processes that enable them to compete against their competitors. Typically, multinationals have been around for a long time and, as a result, have survived multiple market cycles. Their ability to survive these cycles is testament to their resilience. Plus, their experience through market cycles helps them stay ahead of the competition. Another factor contributing to their strength is good management and strong corporate governance practices that are adopted in order to operate in all geographies.
Diversification: Multinationals tend to be the least volatile, and therefore less risky, compared to other thematic mutual funds because these companies are rich in cash and can survive tough times. They operate in several countries and can thus give your portfolio the necessary geographic diversification. Additionally, multinationals can be both cyclical and defensive – there are multinationals in several industries such as pharmaceuticals, FMCG, IT and engineering and therefore a multinational fund can also exist. be well diversified.
Wealth Creation: Multinationals are known to be very stable when it comes to generating long-term returns and could be perfectly suited for a long-term investment. If your investment horizon is long term, that is, more than 5 years, the volatility is smoothed out and can potentially improve the risk-adjusted returns of your portfolio.
Investment options available
For an investment seeking to invest in the MNC space, the optimal approach remains to opt for a thematic mutual fund based on the MNCs. Currently, an investor has a choice of four funds to choose from. If you are an investor who is comfortable with the portfolio having a fair share of foreign stocks as part of their portfolio, you may want to consider the MNC Fund of ICICI Prudential Mutual Fund. Here, as of August 2021, the portfolio has 20% exposure to international securities spread across sectors such as computer hardware, software, non-durable consumer goods, and petroleum and petroleum products. In addition, the fund has an outstanding performance history when it comes to the performance of the fund.
In conclusion, 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-generating potential of MNC stocks.
(CA Jintendra Agarwal of JNV Advisors LLP)
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