Mutual Funds

Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund NFO: Taking the pulse of healthcare stocks

Maulik Madhu | Updated on October 10, 2020

The fund will invest in large global healthcare firms and rapidly growing Indian ones

Edelweiss Asset Management, in collaboration with MSCI, recently launched Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund. While there are many thematic funds in India, the Edelweiss one is the first thematic index fund to be launched in the country.

The fund will invest in the stocks of the underlying MSCI India Domestic & World Healthcare 45 Index.

The index is a mix of the top 25 Indian and the top 20 global (US-listed) healthcare stocks based on their market cap.

It will be rebalanced quarterly and the changes in the securities and their weights will be reflected in the fund portfolio. The Indian and the global segments have been weighted 70 per cent and 30 per cent, respectively.

MSCI has created the index exclusively for the Edelweiss fund from securities in the MSCI India Domestic IMI and the MSCI World Index.


A slice of global and India healthcare

Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund offers investors an opportunity to get exposure to global pharma companies and rapidly growing Indian ones. Most Indian healthcare/pharma funds invest only in Indian-listed companies.

The scheme provides exposure to the healthcare sector which includes — in addition to pharma companies — hospitals, diagnostic chains and biotechnology firms. It will invest 95-100 per cent of its corpus in healthcare stocks.

The expense ratio is 0.4 per cent in direct plan and 1 per cent in regular plan. This is lower than the expense ratio of most actively managed healthcare/pharma funds, given that Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund is passively managed.

Our take

A factor in favour of pharma-focussed funds (whether active or passive) is the positive earnings outlook for the sector and, hence, the potential for healthy returns in the next 3-5 years. Part of this comes from the increased government healthcare spending as a result of the pandemic.

For instance, in March, the Centre announced an incentive scheme worth ₹10,000 crore to support domestic manufacturing of pharmaceutical ingredients for which Indian pharma companies are largely import- dependent. The government plans to raise public healthcare spending from around 1 per cent to 2.5 per cent of the GDP by 2025, which should help the sector in the long run.

Further, as pointed in the Edelweiss NFO presentation, the stabilisation in the prices of generics in the competitive US market for now, as also the expected US drug patent expiries in the next 3-5 years, should provide an opportunity for growth. The US is a key market for Indian pharma exports.

Unattractive valuations

However, investors need to note that healthcare stocks have run up sharply since the March lows.

The S&P BSE Healthcare TRI is up 84 per cent since then. This does not offer much comfort on valuations. Also, as with any sector fund, there can be periods of underperformance.

Price-to-earnings data for the MSCI India Domestic & World Healthcare Index (source: Edelweiss Asset Management) indicate the index was trading at 25.8 times as on August 31, 2020, above its 10-year average P/E multiple of 20.4 times. In terms of the price-to-book ratio, the index was close to its average P/B ratio of 2.7 times then.

While we don’t have data for after August 2020, the S&P BSE Healthcare Index data show that valuations for the domestic healthcare sector haven’t changed much since then.

So, while the index may not turn out to be very expensive if we were to account for future earnings growth, it is not cheap at the moment either.

Err on the side of caution

Investors can consider staggered investment in the form of monthly SIPs, but should keep their exposure to thematic funds (including healthcare) to ideally not more than 5-10 per cent of their equity allocation depending on their risk appetite.

Timing (entry and exit) matters, too, when it comes to investing in thematic funds. Also, one needs to have some understanding of the sector. The new fund offer is open until 20 October 2020. You can invest in the fund afterwards, too.

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Published on October 10, 2020
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