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Your Questions Answered: What is Nifty MidSmall Healthcare Index and how is it different from Nifty Healthcare Index?
The Nifty MidSmall Healthcare Index tracks midcap and smallcap stocks in India's healthcare sector, offering diversification.
Q. I am an operations executive working with an MNC in Delhi, my wife is a private school teacher. We have been investing in the Sensex tracking index mutual funds since the past 5 years, we now want to diversify our investment and invest in other index funds. Many of our acquaintances have suggested investing in the Nifty MidSmall Healthcare Index, can you please elaborate on it, its pros and cons and how it is different from the Nifty Healthcare Index?
Sameer Prajapati, Greater Kailash - 2, Delhi, India
The Nifty MidSmall Healthcare Index is a specialised index that offers investors a snapshot of the midcap and smallcap segments of India's burgeoning healthcare sector. This index is meticulously designed to track the performance of companies that are considered mid-sized or small-sized in terms of market capitalization, providing a unique perspective on a vital part of the economy.
Understanding the index composition
The index is composed of up to 30 stocks, selected based on their free-float market capitalization. This method ensures that only the shares available for trading are considered, offering a more accurate reflection of market movements. The Nifty MidSmall Healthcare Index is a subset of the broader Nifty MidSmallcap 400 index, which includes a wider range of mid and small cap stocks across various sectors.
Index characteristics
The Nifty MidSmall Healthcare Index stands as a testament to the dynamic nature of the healthcare industry. The index has a base date of April 01, 2005, and started with a base value of 1000, which allows investors to track its performance over time. The weight of each stock in the index is determined by its free-float market capitalization, ensuring that the index is balanced and representative of the sector's performance.
Sectoral distribution and rebalancing
The index is reconstituted semi-annually and rebalanced quarterly to reflect the changing landscape of the healthcare sector. This includes adding or removing stocks to ensure the index remains relevant and up-to-date. The weight of no single stock can exceed 33%, and the weights of the top three stocks cumulatively cannot be more than 62% at the time of rebalancing, which mitigates the risk of over-concentration.
Performance and trends
The performance of the Nifty MidSmall Healthcare Index is a barometer for the health of the mid and small cap segments of the healthcare industry. As of March 28, 2024, in the past one year the index has given a return of 58.23% and the past 5-year average return has been 17.73%. However, it should be noted that past returns are not necessarily indicative of future returns.
Investment implications
Investing in the Nifty MidSmall Healthcare Index can be a strategic move for those looking to diversify their portfolio and tap into the potential of the healthcare sector. With its focus on mid and small cap stocks, the index offers exposure to companies that may have higher growth potential compared to their larger counterparts, albeit with a corresponding increase in risk.
Pros
- Diversification: One of the primary benefits of investing in a mutual fund tracking the Nifty MidSmall Healthcare Index is the diversification it offers. Investors gain exposure to a basket of healthcare stocks, spreading out the risk as opposed to investing in individual stocks.
- Sector-Specific Growth: The healthcare sector has been one of the fastest-growing sectors, especially in the wake of global health challenges. Investing in a mutual fund that focuses on this sector could potentially offer higher returns due to the growth prospects of healthcare companies.
- Professional Management: Mutual funds are managed by professional fund managers who have the expertise and resources to analyse and select stocks that have the potential to generate good returns, which can be beneficial for investors who may not have the time or expertise to manage their investments.
- Liquidity: Mutual funds offer liquidity, allowing investors to buy or sell their fund units on any business day, providing flexibility and ease of access to their money.
Cons
- Market Risk: The healthcare sector, like any other, is subject to market risks. Political changes, regulatory updates, and economic downturns can all affect the performance of healthcare stocks.
- Sector Concentration Risk: While sector-specific funds can offer higher growth potential, they also come with higher risk due to concentration in one sector. If the healthcare sector underperforms, it can negatively impact the fund's performance.
- Volatility: Mid and small-cap stocks can be more volatile than large-cap stocks. This means that the Nifty MidSmall Healthcare Index can experience higher levels of volatility, which can lead to significant fluctuations in the fund's value.
Nifty Healthcare Index vs. Nifty MidSmall Healthcare Index
Aim: The Nifty MidSmall Healthcare Index is designed to track the performance of midcap and smallcap stocks within the healthcare sector. This index includes up to 30 stocks and is based on free-float market capitalization. The eligibility for inclusion in this index is contingent upon the stocks forming part or going to form part of the Nifty MidSmallcap 400 index at the time of review. The weight of each stock in the index is determined by its free-float market capitalization, ensuring that no single stock has a weightage of more than 33%, and the cumulative weight of the top three stocks does not exceed 62% at the time of rebalancing.
On the other hand, the Nifty Healthcare Index is designed to reflect the behaviour and performance of healthcare companies, comprising a maximum of 20 stocks that are part of the Nifty 500 universe. This index provides a snapshot of the larger healthcare companies and includes pharmaceutical giants, hospital chains, and other related entities. The Nifty Healthcare Index is computed using free float market capitalization, similar to the MidSmall Index, but it is more focused on the larger players in the sector.
Constituents: One of the key differences between the two indices lies in their constituent base. The Nifty MidSmall Healthcare Index, as the name suggests, includes midcap and smallcap companies, which are generally considered to have higher growth potential but also come with higher volatility and risk. These companies are often in the growth phase of their business cycle and can offer significant returns if they are successful in scaling their operations and increasing their market share.
In contrast, the Nifty Healthcare Index constituents are typically well-established large-cap companies with a more stable performance record. These companies are leaders in their respective sub-sectors and have a significant presence in the market. Investors looking for stability and lower volatility in the healthcare sector may prefer the Nifty Healthcare Index due to its focus on larger companies.
While both indices offer exposure to the healthcare sector, they cater to different segments of the market and investor preferences. The Nifty MidSmall Healthcare Index is suitable for those looking to invest in the growth potential of midcap and smallcap healthcare companies, while the Nifty Healthcare Index is more appropriate for investors seeking exposure to larger, more established healthcare entities. Understanding these nuances can help investors make informed decisions that align with their investment objectives and risk tolerance.
Taxation of mutual funds tracking Nifty MidSmall Healthcare Index
Mutual funds are broadly classified into equity-oriented and debt-oriented funds for taxation purposes. Equity mutual funds are those where more than 65% of the total fund amount is invested in equity shares of companies. Mutual funds tracking the Nifty MidSmall Healthcare Index are classified as equity funds since more than 65% of their corpus is invested in equity stocks. For these funds, short-term capital gains (STCG), realised on selling units within a year, are taxed at 15%, irrespective of the investor's income tax bracket. Long-term capital gains (LTCG) over ₹1 lakh are taxed at 10% without the benefit of indexation.
In conclusion, the Nifty MidSmall Healthcare Index is more than just a financial metric; it's a gateway to understanding and participating in the growth of India's healthcare sector. By providing a focused and balanced representation of mid and small cap companies, the index serves as a valuable tool for investors who are keen on exploring this vibrant and essential part of the economy.
The Nifty MidSmall Healthcare Index is a fascinating index that reflects the dynamism and potential of the healthcare sector. Whether you're an experienced investor or new to the market, understanding this index can provide valuable insights into the opportunities and challenges within this critical industry segment.
Disclaimer: Investing in mutual funds involves risks, including potential loss of principal. Please consult with a financial advisor before making any investment decisions.
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Business NewsMutual FundsYour Questions Answered: What is Nifty MidSmall Healthcare Index and how is it different from Nifty Healthcare Index?
First Published:1 May 2024, 08:56 AM IST
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