DSP Mutual Fund has launched a new fund that will invest in the companies across healthcare sector, including pharma, diagnostics, hospital and insurance. The fund will tap the opportunities arising out of growing demand, export opportunities and conducive policy environment.
The new fund offer (NFO) opened on November 12 and will close on November 26.
Pharma stocks have been doing badly over the past two-three years, after having a dream run between 2012 and 2015, due to some internal and external factors.
"US is the major revenue contributors for most of the pharma companies. There has been two big changes in the US market, which has badly impacted the Indian pharma companies. The US Food and Drug Administration (USFDA) has reduced the approval time from four years to one year. This has resulted into increasing competition. Also, there has been a customer consolidation in US markets, which has given them more bargaining power against generic manufacturers, which has resulted into price erosion. At the same time, the approvals for the Indian companies have reduced due to facility problems," said Praful, Bohra, Associate Director, Equirus Securities.
"That apart, there were Fixed Drug Combination (FDC) ban and National Pharmaceutical Pricing Authority (NPPA) price regulation which negatively impacted the pharma sector," he added.
However, Praful is hopeful about the sector's long-term prospects. "All these factors have impacted the earnings of the pharma companies, and thus the performance of pharma stocks. However, the underlying trend with the Indian business remains strong and once the dust settles, from whatever issues they had in the past, the trajectory would be back to 14-15 per cent in the domestic market."
The fund house believes that these are interesting times for Indian healthcare sector despite disappointing earnings in FY18. The sector has the potential to get re-rated after temporary disruptions get resolved. Also, the sector in the long run will benefit from the rising demand due to an increase in affordability, rising income, aging population and increasing lifestyle diseases.
Comparison with the peers
There are already six funds in the category while the oldest UTI Healthcare has been in the business since June 1999. So, is this fund different from others?
In order to reduce the concentration risk, the fund will invest 25 per cent in international stocks especially US. "We would invest higher proportion of the fund in small and midcaps versus peers. Data suggests that peers have about 50 per cent exposure in large-caps and 50 per cent in mid and small caps. We would have only 10-20 per cent exposure in large-caps and 60-80 per cent in mid and small-caps. We believe that mid and small-caps have gone through a deep correction in recent past unlike large caps and hence the entry point is attractive. The quality of earnings in large caps is still fragile and vulnerable to US competition and that of mid and small caps is more robust," says Aditya Khemka, Fund Manager, DSP Mutual Fund. He will be managing the fund.
"We would invest 40-50 per cent of corpus in healthcare (hospitals, diagnostics, insurance and medical devices) vs peers at 5-15 per cent. We would have a lower exposure to pharmaceuticals (50-60 per cent) vs peers at 85-95 per cent," he added. The fund manager plans to invest in 20-25 stocks.
Should You invest?
Sector funds are more volatile than diversified funds and should not make it to the core of the portfolio. Also, experts believe that retail investors will be better off investing in diversified funds.
"Sector funds are for matured investors, who are gung ho about the sector and believe that the existing allocation in their portfolio is less. Such investors can have exposure to sector funds. But, we would also recommend funds with a proven track record. One should go for an NFO only if the theme or sector is unique and looks promising and there are no existing funds in the category," said Suresh Sadagopan, Founder of Ladder7 Financial Advisories.