Should you invest in Kotak Nifty MNC ETF

There are many themes that haven’t done well in the last few years despite a strong bull market. MNC stock investing is one of them if one compares its returns with that of a broad-based benchmark such as Nifty 100.

Against this backdrop, Kotak Mutual Fund has unveiled the first exchange traded fund (ETF) offering based on MNC index in the form of Kotak Nifty MNC ETF. The other schemes in this thematic category are all actively-managed—SBI Magnum Global, ABSL MNC, UTI MNC and ICICI Pru MNC.

As the ETF’s NFO period closes on August 4, we present a quick overview of the new fund. Here are the details:

Why MNC stocks now?

MNC stocks listed in India offer a good mix of able management, technological edge, high utilisation of capital, strong balance sheet and established brands. They are present in sectors such as FMCG, capital goods, auto, healthcare, IT, etc.

In fact, MNC stocks, on account of their heritage and advantages, are valued higher than many largecaps.

For instance, Nifty MNC trades at a trailing price to earnings ratio of 55 times now compared to 21 times for Nifty 50. At the same time, Nifty MNC offers a reasonable 3 per cent plus dividend yield compared to just 1.3 per cent for Nifty 50.

In the recent times, MNC stocks haven’t done that well. In the last one-, three- and five-year periods, MNC stocks have under-performed in comparison to large-caps (represented by Nifty 100 index).

Given that stocks, sectors and themes in the share market go through rotation, MNC stocks could play catch up. Instead of buying MNC stocks on their own, new investors as well as those with no time to research, can either buy actively managed MNC funds or use an index fund/ETF based on a suitable MNC stock basket.

How is Nifty MNC index positioned?

The Nifty MNC Index comprises 30 listed companies on NSE in which the foreign promoter shareholding is over 50 per cent. This is an important differentiation as some actively-managed MNC funds replace the “50 per cent criteria” with “majority” shareholding requirement. This allows companies managed by foreign promoters even without 50 per cent shareholding into the portfolio.

Nifty MNC Index is computed using free float market capitalisation method. The index is rebalanced semi-annually. In terms of sectoral representation, its stock basket is dominated by fast moving consumer goods, capital goods, automobile and auto components and healthcare, while metals and mining, construction materials, IT, consumer durables, etc. have less than 5 per cent allocation each.

As on July 29, the top-10 stocks (by weight) are Hindustan Unilever Ltd., Nestle India, Maruti Suzuki India, Britannia Industries, Vedanta, Ambuja Cements, Siemens, United Spirits, Ashok Leyland and Colgate Palmolive (India).

Comparing the Nifty MNC with benchmarks such as Nifty 50 and Nifty 500 will show unique sector composition and, thus, notable difference in diversification.

For instance, at over 40 per cent, the FMCG sector’s weightage in Nifty MNC is almost five times more than what the sector has in the other two broad market indices. Similarly, Nifty MNC is hugely underweight on financial services (no exposure) compared to 30-35 per cent for the others.

Performance history

The Nifty MNC index is no pushover. It is competing quite well with actively-managed funds. In the one-year period, none of the four actively managed funds have been able to beat the Nifty MNC TRI’s 10 per cent odd gain.

In the last 3-year period, two of four funds have beaten the MNC index’s 19.2 per cent rise (CAGR) but that can be argued to be partially driven by stocks from a much broader investible universe such as international companies.

Nifty MNC, to be fair, only captures domestic performance of foreign companies listed in India. In the 5-year and 10-year period, gains of 10.1 per cent and 15.4 per cent by Nifty MNC proved difficult to be matched by two out of three funds.

About the ETF

During the NFO period, minimum investment in Kotak Nifty MNC is ₹5,000 and in multiples of ₹1 thereafter. There is no exit load. Indicative total expense ratio (TER) is 30 basis points, which is much cheaper than 2-2.4 per cent (regular) and 1-1.25 per cent (direct) expense ratio by actively-managed MNC thematic funds.

Do note that the key risks to be considered before investing in MNC stocks/basket are limited control as they are driven by parent companies and royalty concerns.

Since this is a new offering, liquidity, impact cost and traded volume data is not available for the ETF. These are important for large lumpsum purchases, and could impact investor’s returns.

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