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ITI Pharma & Healthcare fund NFO review: Should you invest in it?

Investors are worried about steep valuations in the equity market. The healthcare sector is traditionally regarded as a defensive bet during such times

October 22, 2021 / 09:48 AM IST

ITI Pharma and Healthcare Fund (IPHF) is the latest new scheme to be rolled out. This is the sixth mutual fund (MF) focused on the healthcare and pharmaceuticals sector to be launched since the onset of COVID-19 in March 2020. But pharma funds have underperformed in the last one year, delivering just 29.4 percent return. Most other fund categories, including thematic ones, have given 20-60 percentage points more over the same period, as per Value Research data.

What’s on offer

IPHF will be benchmarked against the Nifty Healthcare Total Return Index. Pradeep Gokhale and Rohan Korde will be the fund managers of the scheme.

After a strong bull run, investors are worried about steep valuations in the equity market. Many are busy finding some defensive bets as markets turn volatile. The healthcare sector is traditionally regarded as a defensive bet during such times.

Vishal Dhawan, Founder and Chief Financial Planner, Plan Ahead Wealth Advisors says, “Over the last few years, investment opportunities in the listed space have expanded from formulations and manufacturing focused pharma companies to include hospitals and diagnostic chains, offering diversification benefits within the sector. After the COVID-19 pandemic, there is an increase in general awareness in the population about preventive healthcare as well.”

After underperforming over 2016-2019 due to regulatory headwinds and pricing pressures, stocks in the pharma sector bounced back for couple of quarters in 2020 in the wake of COVID-19. But they underperformed subsequent in the rally, as investors shifted to cyclicals when equity markets recovered. This, in turn, led to a broader rally in the equity markets.

Is the pharma sector on the verge of recovery?

George Heber Joseph, chief executive officer and chief investment officer, ITI MF says, “Domestic sales are going to experience 10 to 13 percent growth over the next five years. Export businesses, especially in the US have not done well over last few years, but are showing signs of recovery. That makes it an opportune time for investment in select pharma and healthcare stocks.”

The Indian listed space may see more stocks getting added, offering exposure to varied businesses under healthcare umbrella.

“The pharma sector has a lot of scope for bottom-up stock picking as business models of companies differ from each other. Despite a rally in the broader markets, the pharma and healthcare sector has not moved up as much and there are good investment opportunities at attractive valuations in some segments such as formulations,” Joseph adds.

Says Rupesh Bhansali, Head-Mutual Funds, GEPL Capital, “The rise in demand for healthcare services is going to be a structural trend. At the same time, incentives offered by the government to segments such as active pharma ingredients, can make the sector a long-term investment opportunity.”

He recommends staggered investments in healthcare funds.

What doesn’t

Healthcare is a complex sector. And just like any sector fund, investors must time their entry and exit well to make the most out any major rally.

Investments in this sector have gone up globally and experts say that to get the best of out this sector, investors must look beyond India as well. Dhawan says, “Investors keen on healthcare funds have to also choose between portfolios offering domestic healthcare equities and portfolios offering both domestic as well as global healthcare equities. Stocks listed overseas can offer meaningful diversification.”

IPHF will not invest in stocks listed overseas.

The broader market rally has led to expensive valuations. Though healthcare stocks have underperformed the broader market, valuations are not cheap.

What should you do?

The fund house may have timed the launch of IPHF to benefit from the low investor interest in healthcare stocks. Now, the defensive nature of sector, coupled with a long term secular trend investment argument, may appeal to many investors looking for less volatile investments in equities. However, the same set of opportunities can be accessed through other healthcare schemes with track records.

Investors should let this scheme build a track record before they start investing in it.

The new fund offer of IPHF closes on November 1, 2021.
Nikhil Walavalkar
first published: Oct 22, 2021 09:48 am