Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund NFO: Should you invest?

Vaccine research and development are undertaken by many pharmaceutical and drug companies worldwide, given the ranging COVID-19 pandemic. So, fund managers and investors have been lapping up stocks of pharmaceutical companies in the hope that they would be beneficiaries of a vaccine or drug discovery. That explains why the healthcare sector has done well in the markets this year. Healthcare funds have given 53.59 per cent returns year-to-date; in contrast, multi-cap schemes lost 3.59 per cent.

To join the list of nine pharma & healthcare schemes already available in India, we have the Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund (EM Health).

What is on offer

EM Health is an open-ended scheme that aims to replicate the MSCI India Domestic & World Healthcare 45 Index. This index has domestic as well as international healthcare companies. EM Health will invest 70 percent of its portfolio in the top 25 Indian healthcare stocks by market capitalization.

It will invest the remaining 30 percent in US-listed healthcare companies. So, this means, the fund would invest the US portion in 20 firms – the top five companies in each of the four categories:  pharma, healthcare equipment, biotechnology and life sciences tools & services.

By incorporating stocks from both the India and US, the scheme offers diversified exposure to businesses in the healthcare sector’s value chain.

What works

Healthcare expenditure has gone up significantly due to the pandemic. The trend is expected to continue for the foreseeable future. Companies in the underlying index can benefit from this increased focus on healthcare.

Unlike other schemes in this category, EM Health will be passively managed, which means there is no fund manager risk. The scheme’s expenses should also be significantly lower than those of actively managed equity funds.

Though a couple of existing healthcare funds have small weightages to overseas stocks, this is the first fund to offer dedicated exposure to firms listed in the US. Being an index fund, the scheme is expected to be true to label.

What does not work

Sectoral funds are dependent on the sector specific issues and can give returns far different from the broad markets. If the healthcare sector slows down or the governments come out with restrictive policies such as price control then the profitability of the underlying companies may get affected. In 2017, when the stock markets did well, multi-cap funds gave 36.68 per cent returns, whereas pharma funds delivered just 5.13 per cent, according to Value Research.

The scheme is launched after the healthcare sector has posted high growth over the last few months. Healthcare funds as a category have given 68.05 per cent returns in the last one year. “Given the enhanced focus globally on the healthcare sector and returns over the last few months delivered by healthcare stocks, this is the most opportune time to launch a healthcare fund NFO,” says Amol Joshi, founder of Plan Rupee Investment Managers.

Should you invest?

Investing in a healthcare fund after the sector has done quite well would seem enticing going by its past returns – an action that  should ideally be avoided. “Many a time, investors chasing past returns end up loading up on themes that may not deliver as much in the future,” says Vishal Dhawan, founder and chief financial planner of Plan Ahead Wealth Advisors. Of course, the sector’s good run may just continue, but there is no certainty that it will happen.

Being a passive fund, EM Health aims to remove fund manager risk. A low-cost passive strategy with geographical diversification is not a bad option. Then again, it’s a sector fund and therefore carries higher risks than a diversified global scheme.

If you do not understand the dynamics of the healthcare sector – all pharmaceutical companies for instance do not benefit from vaccine manufacturing – it’s best to stick to more diversified, existing offerings that come with a track record.

The fund offer opened on October 6 and closes on October 20, 2020.