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After years of underperformance, the Indian healthcare sector sprang into action post March 2020 as the first wave of covid-19 hit the country. However, from December onwards, the sector went into a healthy correction as investors moved to cyclicals as the economy opened up. The fresh spike in cases has again made the case for tactical allocation to healthcare.

To ride the trend, Axis Mutual Fund on Friday launched Axis Healthcare Exchange-Traded Fund (ETF). The open-ended ETF, which will close on 10 May, will track the Nifty Healthcare Index, and will be managed by Jinesh Gopani, head of equity, Axis AMC.

According to Axis MF, the healthcare sector is at the cusp of building its domestic footprint after capturing significant economic interest and credibility in overseas markets.

This month, ICICI Prudential Asset Management Co. Ltd is also planning to launch a healthcare ETF, which will track the Nifty Healthcare Index.

Photograph From Istockphoto; Graphic By Paras Jain/Mint
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Photograph From Istockphoto; Graphic By Paras Jain/Mint


The index comprises the 20 largest healthcare-oriented firms by free-float market capitalization, including hospitals, diagnostics players, pharma makers and R&D players.

“We are going to see significant growth in the middle class, and the requirement for healthcare and pharma is going to go up exponentially. The government’s focus and spending on pharma is also increasing. Moreover, the global footprint of Indian pharma companies is among the largest in terms of volumes," said Chintan Haria, head of products and strategy, ICICI Prudential AMC.

During 2010-15, the Indian healthcare sector saw one of its best growth years, driven by pharma companies. This was in large part fuelled by many global drugs that went off-patent during the period, as Indian companies got the benefit of generic licensing.

After the peak of 2015, the sector saw a few years of underperformance, when other sectors such as consumer durables ruled the roost.

Experts say that 2020 witnessed a catch-up by these companies, and the recent correction gives investors an opportunity to enter the sector from a five to 10-year perspective.

“Pharma has been one of the fastest growing sectors in India for the last three decades. For the next five to 10 years, the outlook will be the same. Even if there might be volatility in the short term, the long-term growth prospects look promising in healthcare," said Haria.

According to a recent NITI Aayog report, the healthcare industry has become one of the country’s largest in terms of both revenue and employment. It has been growing at a compounded annual growth rate (CAGR) of 22% since 2016, employing 4.7 million people directly. Moreover, the sector has the potential to generate 2.7 million additional jobs between 2017 and 2022.

Experts say this sector is going to benefit from increasing purchasing power of the people and GDP growth.

On the policy front as well, the government has been undertaking sustained reforms to strengthen the healthcare sector. The Atmanirbhar Bharat Abhiyaan packages include several short-term and long-term measures for the health system, including production-linked incentive (PLI) schemes for boosting the domestic manufacturing of pharmaceuticals and medical devices.

Financial advisers are also bullish on the sector. “Every sector is cyclical, but pharma along with FMCG are defensive and evergreen sectors. They will not have many ups and downs compared with other thematic funds," said Nishith Baldevdas, founder of Shree Financial and a Sebi-registered investment adviser.

However, remember that equity investing carries high risk. As a strategy, experts suggest that investors might be best served by investing into diversified equity funds, where fund managers take graded overweight or underweight calls on sectors relative to the benchmark.

“Equity markets go through cycles and sector rotation in terms of performance is seen. So, it becomes important for investors to have the wherewithal to be able to take views on the sector and market cycle and invest accordingly. Only those who are in a position to evaluate specific sectors should take exposure," said Kaustubh Belapurkar, director - manager research, Morningstar India.

Generally, for a do-it-yourself investor, ETFs are a better option. “For thematic funds, any aggressive investor can have a 5-10% allocation in their portfolio," said Baldevdas.

On the taxation front, since healthcare funds are equity funds, short-term capital gains on redeeming units within one year are taxed at a flat rate of 15%, irrespective of your income tax bracket, while long-term capital gains are taxed at the rate of 10%, and there is no benefit of indexation.

While experts are bullish on healthcare from the long-term perspective, they warn that there might be some volatility in the near term. Investors should note that as equity investing carries high risk, they should allocate to these funds based on risk profile and asset allocation.

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