Mutual Funds

Should you invest in Axis Healthcare ETF?

Maulik Madhu BL Research Bureau | Updated on May 02, 2021

Investing in a thematic fund suits only those with a high risk appetite

Axis Mutual Fund has launched its Healthcare ETF (exchange traded fund), a passively managed fund that will closely replicate the Nifty Healthcare Total Return Index (TRI). The NFO opened on April 30 and will close on May 10, 2021.

The Axis Healthcare ETF will provide investors exposure to the Indian healthcare sector including pharma companies, hospitals and diagnostic service providers.

The Nifty Healthcare TRI that the ETF will track comprises the twenty largest healthcare-related companies based on free float market capitalisation, listed on the NSE.

The top index holdings are Sun Pharmaceutical Industries, Dr. Reddy’s Laboratories, Divi’s Laboratories, Cipla and Apollo Hospitals.

While the outlook for the healthcare sector looks promising, expensive valuations for many stocks call for some investor caution.

Today, investors may be better off investing in select healthcare stocks that still offer a good return potential rather than investing in a wider basket of market cap weighted stocks from the sector.

This is especially so for a sector as heterogenous as healthcare.

Also, note that investing in a theme-focussed fund is ideally suited only for those with a high-risk appetite.

Positive sector outlook

Healthcare stocks came under the spotlight after the outbreak of the Covid-19 pandemic last year. The Nifty Healthcare TRI has doubled since the March 23, 2021 market low. This has been thanks to a positive earnings outlook for the sector backed by several growth factors.

Increased government spending on healthcare amid low penetration of healthcare services in the country, and the rising incidence of lifestyle diseases are a few long-term growth drivers.

Greater focus on health and hygiene products and burgeoning demand for vaccines, Covid treatment drugs and testing services post-Covid are some recent growth drivers.

Greater opportunities in the competitive US generics market as more drugs go off patent, and as Indian pharma companies climb up the value chain in this space can work in favour of Indian pharma companies.

Unattractive valuations

However, many healthcare stocks have run up sharply over the last one year or so. The Nifty Healthcare index is trading at a price-to-earnings multiple of 37.9 times. In the absence of valuation data for the index prior to November 2020, a historical comparison cannot be made. However, one can look at the valuations for the S&P BSE Healthcare Index, another free-float market cap weighted index though with a far larger number of constituents, to get a broad sense on sector valuation. Today, the index is trading at a P/E (Price to Earnings) ratio of 37.6 times, above its five-year average P/E multiple of 33.3 times.

Invest with caution

Those interested in a passive exposure to the Indian healthcare sector could invest a small sum in the Axis Healthcare ETF. The minimum investment in the NFO is ₹5,000 and in multiples of ₹1 thereafter. Depending on their risk appetite, investors can limit their exposure to thematic funds (including healthcare-focussed) to ideally not more than 5-10 per cent of their equity allocation. Additionally, when it comes to investing in thematic funds, timing your entry and exit matters.

Published on May 01, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.