Investor interest in the healthcare industry has risen over the past few years on the back of growth prospects. Tapping into the healthcare sector through a thematic fund can be a lucrative avenue albeit one fraught with complications, according to analysts.
"This segment is going to be extremely volatile and extremely cyclical," said Rushabh Desai, founder at Rupee With Rushabh Investment Services.
"Just before 2020, we saw a slump in the pharma and healthcare segments. It's only after 2020 that we see a huge demand for products," he said.
Timing is important in terms of entry and exit from the healthcare sector for investors, Desai said.
Inflated expectations based on past performance could be the undoing of investors looking at thematic plays like the healthcare sector, said Kaustubh Belapurkar of Morningstar India.
"We have seen portfolios where people end up buying 20-30% of a sectoral exposure, which is massively dangerous because you're so lopsided in your returns as an investor," Belapurkar said. "It can be a boom or bust."
There could be a couple of more years before the price movement of the stock happens, he said.
Desai sees the current scenario to be conducive for entering the healthcare segment as the valuations are trading below the 10-year long-term average.
Investors who are not well-versed with the workings of the sectors can opt for a flexi-cap or focussed fund, he said.
That's because fund managers eventually will take the opportunity in different sectors and different stocks, depending on how the markets and stocks move, according to Desai.
Watch the full video here:
Edited excepts from the interview:
Kaustubh, in terms of ELSS, is this a good time as any to start?
Kaustubh Belapurkar: We have spoken about this the last few years and... the paradigm is slightly shifted, given that the new tax regime versus the old tax regime, ELSS may not make sense in the traditional sense for all. But I still think they are fantastic, investment opportunities. Tax benefits aside, just a standalone investing opportunities, they trade and like we have been talking about, they are like any traditional diversified equity fund.
So, when you look at an ELSS fund, the only difference technically is a three-year lock-in that comes in. And from my perspective, that's actually a great thing because it's kind of just instilled some discipline in the investor who are looking to redeem that in a hurry. So, that's a great benefit and it also adds an additional benefit to the fund manager where he or she has visibility about the assets that remain for some amount of time. So, they can manage it more efficiently.
As you rightly said, that we haven't responded at the start of the financial year, which is great because ... they tend to be lumpy towards the end of the financial year. Our advice to investors has always been like you are doing your SIPs in other diversified equity funds. Why not do that in an ELSS fund also?
I mean, you're getting your tax benefit, especially if you are in your old tax regime. Plus, you get the benefit of kind of systematically investing rather than putting that money right at the end of the market (when it) could be up or down. I mean, you would be really subject to the vagaries of the market movement then.
Rushabh, does your view differ when it comes to ELSS investing?
Rushabh Desai: I completely agree with Kaustubh that starting early makes sense and we have observed that because the markets are very unpredictable, you don't know how the markets are going to be at the starting, mid or the end of the year. So, when investors are rushing, probably during the month of January, February and March, end of the financial year, they really don't know how the markets are going to be.
Today, the markets are reasonably priced, that's different. But what if someone would have invested in 2021 or so when markets were expensive? So, they wouldn't have got the kind of returns what one would expect in equity as an asset class. So, I usually tell my clients to do this in a staggered way. Divide your money, do an SIP month on month, that is the best way to do it in an ELSS.
If you are taking other products like other categories, then if you are doing lump sum, that's different because you can still time the markets in that sense when the markets fall. We have seen historically markets are falling anywhere between 10% and 20% year on year. But when it comes to ELSS, especially tax saving, it should be done in a disciplined way and a staggered approach over a period of 12 months...
Rushabh, are there schemes that you have traditionally liked within this ELSS bucket; they may not necessarily be an exhaustive list and may not necessarily be the only ones. But are there are one or two examples you can give of funds that you believe are good on the ELSS side?
Rushabh Desai: I like actually two funds over here. One is DSP Tax Saver Fund, which has done consistently well... outperformed the benchmark. And the second fund I like is the Mirae Asset Tax Saver Fund. But again, I tell everyone that don't just choose products randomly, match it with your existing portfolio.
Say for example, if your portfolio is more inclined towards growth, probably choose a value-oriented or a blended-oriented kind of ELSS product and if your portfolio is more inclined towards value, then choose a growth-oriented kind of fund.
So, match it with your portfolio overall style and we have seen today value is doing phenomenally well. Like a few years ago, growth was going well. So, value and growth both will have cycles of outperformance and underperformance. So, I feel having a balanced style in one's portfolio is very important.
Okay, Kaustubh, what schemes are you watching out for?
Kaustubh Belapurkar: When you think about positioning of a fund in your portfolio, it needs to be looked at from the context of the entire portfolio. ...You need to blend styles within that and not just pick a fund as a standalone basis, one needs to look at it from an overall portfolio perspective.
So, one of the funds that Rushabh mentioned is also one of the funds that we like—Mirae Asset Tax Saver Fund... kind of growth at a reasonable price. The manager is obviously very seasoned and can manage it, and that's one fund that we like.
The second fund and Rushabh also touched upon that has been more recently been doing fantastically well. You look at this fund, which is Axis Asset Long Term Equity, and this is a more growth-oriented fund. Jinesh manages this strategy.
When you think about it, it had a stellar run in the years of 2018-20 when growth was in favour. But if I just dial back time before that, 2016-17 were poor periods for growth and there is a similar period in the last couple of years when value cyclicals were outperforming growth and the fund did underperform.
But the proof of the pudding in both these time periods in 2016-17 and the last couple of years, the fund managers largely stuck to their growth style. So, which is proof of the pudding that look I have a process, I am going to follow that irrespective of the market condition ... So, if you have a value bent in your portfolio, and want kind of growth style manager, the Axis Long Term Equity would again make a pretty reasonable choice within the ELSS bucket.
Rushabh Desai: I just want to add one more thing over here: there is a three-year lock in period, no doubt about it in the ELSS category, but I feel people misunderstand that 'Okay, just because it's a three-year close-ended kind of product, I will get fantastic returns over a period of three years'. Equity, as an asset class, has been very volatile. So, in my view, I think a minimum five-year period has to be given, depending on what point of time you are entering the market and if you're doing an SIP, probably a seven-to-10-year time horizon would be really great.
In the last couple of months, we have heard a bunch of people tell us about how pharmaceutical as a basket or healthcare as a basket is coming up. Every second day or the third day you see a stock getting new 52-week highs. So, we thought it is best to try and figure it out that how do people who don't invest in stocks but want to take advantage of this, play this via the mutual fund route, if at all. Rushabh, this piece I will start with you, Healthcare Funds, are they a yes or are they a no?
Rushabh Desai: First of all, I am really very bullish on the healthcare industry overall. I would like to break the healthcare industry in six parts actually in India. That's how the structure is. One is the pharmaceutical segment, or hospitals, diagnostics. medical equipment, medical insurance and telemedicine. Now, see, we are the largest exporter of generic medicines globally, and we are ranking in the top 10 or probably top 15 in terms of other drugs and medicines what we exported globally. So, in that way, our infrastructure in terms of manufacturing, I mean, of course we are still way behind other developed countries, but our manufacturing infrastructure has been phenomenally done well in my view. So overall, as a pharma sector, yes, different means a bit yes.
Now coming to the healthcare thing, which includes hospitals, diagnosis, medical equipment, insurance and telemedicine. See, in terms of hospitals also, we have really quality medical infrastructure over here. That is why we are seeing a lot of medical tourism coming from outside the country as well. But at the same time, there are so many places where quality healthcare or quality hospitals are still not available.
Now, I myself being a differently-abled person, I understand this segment very well because I faced a lot of difficulties getting quality healthcare over here, quality insurance over here. See, my disorder still does not is covered under the insurance segment. So, we still have a long way to go in terms of having really affordable healthcare for the general public at large. Now, I will give you one more data point for you and your viewers to ponder on. India's healthcare expenditure is actually less than $100 per capita and if you see the world average, it is around more than $1,000. So, you see, the demand is very high. There is a lot of demand, but unfortunately, because of the low per capita, people are not able to afford healthcare in a much better way.
Although, I see huge opportunities where there is negativity. So, in my view, the pharma segment, which is doing phenomenally well, plus healthcare, which is as per the economic survey done in 2021, is expected to grow 3x in this decade. So, a combination of the existing pharma, which is doing phenomenally well and the scope and the opportunity we have in the other healthcare segment, which is hospitals and so on. I really feel you know; tremendous money can be made in the next 10 to 15 years in the healthcare thematic parts.
There is some data that you have given, you have spoken about some funds, you have spoken about how, if we compare the five-year rolling returns and the Nifty 50 TRI versus the Nifty Healthcare TRI, there is some findings out of that, can you talk about this?
Rushabh Desai: Sure, if I pulled out data or from 1st April 2010 to 31st of March 2023 right, that is a 13-year data for a five-year rolling basis. So, over this period of time, 45% of the data points showed that Nifty Healthcare TRI has generated more than 15% CAGR and out of that 45% of that time period, 20% of the time period has generated more than 20% CAGR.
Now, if you see the Nifty 500, only 30% has been able to generate greater than 15% and only 3% of this period has been able to generate greater than 20%. So tremendous. I mean over a period of time; I pulled out the earnings data also. So, historically, the Nifty Healthcare Index has generated higher earnings than the Sensex companies as well. So, the companies are doing phenomenally well returns wise also. We have been seeing that it is generating higher returns than Nifty 500. But one point I want to draw is that this segment is going to be extremely volatile and extremely cyclical. Just before 2020, we saw a slump in the pharma and healthcare segments. It's only after 2020 that we see a huge demand for products so much, we become very health conscious. There's so much awareness of healthcare in our country. So, it's going to be very cyclical and volatile. So, in my view, timing has to be very important, the entry and the exit has to be very important in this sector.
Kaustubh, I reckon from what little I have seen of your responses that you are not necessarily in favour of a healthcare thematic fund or a thematic for in general, am I wrong or am I correct?
Kaustubh Belapurkar: Yes, I think that's the general if he isn’t outlined some of the reasons as to why. So, I Rushabh has very, very nicely articulated that there is a lot of merit in looking at healthcare stocks, and obviously, the opportunity is huge when we were growing economy. Healthcare needs are increasing and all of that is great, but I think from an investor's perspective, and I think Rushabh will also touch upon at that, timing becomes very, very crucial because we have just done a very simple analysis of looking at a sectoral rotation that happens in markets. So, you have different sectors coming to the fore, but from time to time.
So, for instance, 2016-19 was actually an exceptionally bad time for healthcare stocks and then 2020, you have this huge run up in healthcare, are we being the best performing sector along with IT? But the last few years have again been challenging at least from a price perspective on the stocks calendar years of '21 and '22.
So, the challenge is from an investor's perspective, and like you asked if the investor does not have the wherewithal to understand, the semantics of the sector, which Rushabh I think very cleanly articulated, or doesn't understand when to get in, then that's a huge challenge, because often when we're choosing the right and we have seen this in data, you know, which maybe not so much or healthcare or we saw this especially in the technology side, but you know, probably played out in healthcare too.
But a lot of money came into healthcare funds and technology funds after the run up in the segment, it already happened because the sector posted great returns, investors who got into just purely looking at the past performance. But that's the challenge because they have come in and misplaced expectations and they have obviously been disappointed over the last couple of years and that is the biggest challenge that we need to address if you as an investor cannot take that call. Either you could work with a financial adviser who can guide you and even if you do want to take exposure, keep it limited as a part of your portfolio...
We have seen portfolios that people end up buying 20-30% of a sectoral exposure, which is massively dangerous because you're so lopsided in your returns as an investor or it can be boom or bust and you know, that's the challenge. Look at our outline because we've seen that happen with a lot of investors purely looking at past performance and coming in off the sector and buying into funds and you know, that's something which an investor should definitely keep away from.
The other thing obviously even your diversified equity managers will take graded, albeit graded, they will take greater weight underweight calls within their own... equity funds. So it's not going to be one is zero obviously, but they are positive in a certain sector, be it healthcare or otherwise, they would kind of look at i
Just a last bit on timing and maybe the interesting bettors/bidders, given that we have had difficult years of healthcare, and I am just putting it out there. It might not necessarily be such a bad time to think about it. I mean, in conjunction with what Rushabh has already outlined, but you need to be patient... because there could be a couple more years before the price movement of the stock happens and so I think that's something that investors need to keep in mind. I would definitely not be recommending someone to get into healthcare, say in the age of 20-21 when the market had already moved significantly. That will be the time to probably book some profits. So that's just my two bits on you know, sectoral funds, as a general rule.
I think there's an interesting point that you are making Kaustubh, which I want you to explain, which is you are recommending that people should capture ratios of healthcare funds. Can you tell us a bit about this?
Kaustubh Belapurkar: So essentially, the way we look at capture ratio, right, so this will obviously tend to go healthcare fund versus the healthcare index. Essentially, what we're trying to do is to capture ratios, both on the upside and the downside, it looks at the months in which the index, which is the healthcare index, in this case, when it's positive, how much of that positive upside on an average does the fund capture. So, in that sense, the higher the better. So, if you're capturing greater than or close to 100, a greater than 100 basically, you are getting a lot of a positive upside when the index is in the positive at the same time on the downside, because we've already outlined that if you have a volatile index, you want to have a down capture ratio, the markets in which the index is negative, the fund should capture as bad as possible. So, the lower the better in terms of a tam capture ratio. So, when you look at these two in conjunction when you can kind of look at the funds that have done an excellent job or various timeframes in capturing the upside at the same time limiting the downside, when the markets have generally been negative for that particular sector.
Viewers, excuse me for that. It's actually capture ratio a term which Kaustubh said does both of these and if I am not wrong, your observations seem to suggest that Nippon India Pharma and SBI Healthcare Opportunities Regular Growth Fund, growth options in both, are the ones with the better capture ratios of the lot. Okay. So, viewers, for those of you who believe in the argument that Kaustubh was trying to make maybe thematic investing is not for you. However, if you still believe that you would want to take the plunge. Then look at this aspect, which is capture ratios, and try and look at that and on the basis of that if you heard the argument that the two names which is the Nippon India Pharma and SBI Healthcare Opportunities, both the growth options are the ones with the best of the lot, so to say, on a relative basis, so, something to ponder over now.
Rushabh, I want to come to you because you are the one who believes that if fund, can time it then it's actually a really good option to do. Right? So, let's assume you are constructive on healthcare funds currently. How do you choose them? What are the aspects you keep in mind? What is it that you recommend?
Rushabh Desai: It's very simple Niraj. Currently, the valuations are trading below the 10-year long-term average. So, this itself clearly says that this is a really good time to venture into the healthcare segment. But as Kaustubh clearly said that see, if someone is really not into this thematic and sectoral categories, someone who's not savvy, then probably might as well they take exposure through Flexi Cap or a Focused funds because fund managers eventually will take opportunity in different sectors and different stocks as for the markets fall or as for the companies fall accordingly.
So again, just this is mainly for savvy investors, and I would go for a fund which is thematic, there are many sectoral funds out there. So, what a sector fund does, it sticks to a particular sector, it has to stick to a particular sector. But when you say healthcare there are so many factors because its theme, so I would rather bet on a theme fund where the fund manager has the liberty or the flexibility to choose more stocks. The universe is little larger for the fund manager to play with. So ICICI Prudential Pharma Healthcare and Diagnostics fund is one of the funds which I really like. It falls into the thematic category and most of the other funds fall into the sectoral category. It is just because the fund manager has a larger universe to choose his or her stocks. I would bet on a thematic fund rather than sectorial fund.
The names like the ICICI Pru Pharma and Healthcare and Diagnostics fund, for example, would give the fund manager you are saying or any other would give the fund manager the ability to pick across a diverse range of stocks and therefore lessen the downside risk because of the number of options available?
Rushabh Desai: No, I wouldn't say lessen the downside risk, that is not the correct term, I would look at it. See, when you invest in such a volatile and cyclical product, it's not the downside you look at, it's more the upside of what you look at when you invest during the bear market or during tough times. So, it just gives more probability for the fund manager to deliver a little higher return. That's, even if you see the healthcare or the pharma category, many of the funds are outperforming the Nifty Healthcare TRI index. So, in that way, if someone is looking, what do you say just to out beat, that's fine, but in my view, if you choose a thematic fund, probably the thematic fund would be a little less volatile. I wouldn't say less cyclical, but a little less volatile and the upside of the thematic fund would be a little higher than a pure sectarian fund. That's how I would like to put it as.
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