If a retail investor wants exposure to a healthcare ETF, it should be a part of his satellite portfolio, suggests Sanjay Kumar Singh.
Two mutual fund houses -- ICICI Prudential and Axis -- have launched healthcare exchange-traded funds (ETFs) in recent days.
Both will track the Nifty Healthcare index.
India's healthcare sector has sound long-term growth prospects.
Healthcare infrastructure is likely to be ramped up in the wake of the pandemic.
A big driver will be the Ayushman Bharat initiative, which aims to provide healthcare facilities to over 50 crore citizens.
"By 2024, over $200 billion (about Rs 1.47 trillion) is likely to be spent on medical infrastructure to address this requirement," says Chintan Haria, head-products and strategy, ICICI Prudential Asset Management Company.
Growing income and urbanisation will lead to greater health insurance coverage.
Haria says: "By 2022, life expectancy is likely to exceed 70 years, leading to an increased requirement for healthcare support -- diagnostic and imaging centres, advanced medicines, surgeries, and so on."
The pharma sector, which had languished on account of the US Food and Drug Administration's strictures in the past, is better placed now.
"Global companies are trying to diversify their supply chains out of China. Indian companies stand to benefit from this trend," says Ashwin Patni, head-products and alternatives, Axis AMC.
Indian companies have been investing in research and development and are moving up the curve.
"The Indian government's production-linked incentive scheme will aid the sector's growth," says Patni.
Investing in a passive fund eliminates the risk of poor stock selection by the fund manager.
The expense ratios of these ETFs is low -- 15-20 basis points.
Performance comes in bursts
The healthcare sector has performed well in 2020 and the current year.
But it had given negative returns in each calendar year from 2016 to 2019.
"Most investors will find it difficult to put up with negative returns for such a long period, amid the negative news that surrounds a sector in such times," says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.
The Nifty Healthcare Index has risen 52.1 per cent over the past year.
"A large part of the returns from the current rally has already been made. The healthcare sector may continue to perform for some time. But going by the principle of sector rotation, it can also pause or underperform," says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India.
Both these funds are in the ETF format.
"Usually, there is a deviation between the net asset value (NAV) and the price on the exchange, which affects investor returns," says Raghaw.
High exposure can be risky
Retail investors should fill their core portfolio with diversified equity funds.
Their fund managers will increase exposure to sectors, including pharma, which they think are poised to do well.
If a retail investor wants exposure to a healthcare ETF, it should be a part of his satellite portfolio.
"Exposure to a single sector fund should not exceed 5 per cent of the equity portfolio. Have a five-seven-year horizon to benefit from the next rally," says Belapurkar.
Savvy investors, who do their research and have a fundamental view on a sector's prospects, may consider investing in a healthcare ETF, provided they know when to enter and exit it.
According to Raghaw, investors thinking of investing in a passive healthcare fund should also consider the Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund, which will give them exposure to a mix of domestic pharma companies (which sell branded products in India and generics abroad) and foreign pharma giants (which develop new drugs).