Weekly Musings – NFO Pick (Tata Nifty Midsmall Healthcare Index Fund)

26 Apr 2024 , 09:13 AM

WHAT THE INDIA HEALTHCARE STORY COMPRISES OF?

The Tata Nifty Midsmall Healthcare Index Fund NFO is a distinct passive play on the healthcare story in India and its emerging contours. Here is what you need to know about this theme. The healthcare theme in India is broadly classified into pharmaceuticals and the healthcare services, which is the recent addition to the list. The pharmaceutical piece broadly comprises of domestic sales and export sales of APIs and Formulations. While APIs (active pharma ingredients) are the inputs that go in, the formulation is the final product that is usable. These formulations are further classified into generics (non-brands) and branded products. In addition, contract manufacturing (CDMO) has emerged as a very major pharmaceutical business model in recent years. 

The healthcare services of more recent origin. As the name suggests, the healthcare services comprise of hospitals, diagnostic services, supply of healthcare equipment and healthcare technology. In fact, one of the idea of this Midsmall theme here is that a number of companies that are into diagnostic services, research, analytics, and medical supplies will fall in this category. 

WHAT IS MAKING HEALTHCARE AN INTERESTING THEME NOW?

It is now believed that there is a combination of 5 factors that are converging to make the healthcare sector attractive in a multi-faceted way. Here is a gist of the factors driving the rising interest in healthcare.

• Compared to the last few years, the cash flows position of most pharma companies has improved sharply. Even debt levels are down in most pharma companies. 
• Most of the domestic pharma companies with a predominant India base are seeing an expansion in margins as the willing to pay is building up gradually. 
• US markets had suffered from thin margins amidst consolidation in US pharma. Now that is changing and the pricing pressure on drugs in the US has largely stabilized.  
• When it comes to hospitals, most of the big projects are through with their capex and that is leading to a sharp spike in revenue and profitability per bed unit. 
• Post-pandemic, there has been an increase in demand for diagnostic and testing services as people have become more aware and are trying to become prophylactic on health.

The convergence of these factors is likely to make healthcare an interesting theme in the coming quarters.

WHAT IS SPECIAL ABOUT THE NIFTY MIDSMALL HEALTHCARE INDEX?

There are some specific features that make the Nifty Midsmall Healthcare index a good mirror of the shifting contours of healthcare.

• It is focused on mid-sized companies. The index has 68.04% exposure to mid-caps, 29.92% to small caps and just 2.04% to large caps, making it a pure alpha play. 
• Within the overall healthcare mix, the index is still 63.87% weighted to pharma, followed by 23.86% to hospitals and the balance to all other services related to healthcare. 
• In terms of returns, this index has outperformed the Midsmall 400 index over a 1 year and shorter time frames, but has faltered over longer time frame. However, that could be due to the unique nature of healthcare stocks in India.

Nevertheless, mid-sized pharma remains an attractive proposition to investors.

WHO SHOULD INVEST IN TATA NIFTY MIDSMALL HEALTHCARE INDEX FUND NFO?

Being an equity fund focused passive fund play on the healthcare theme, fitment obviously matters. Here are some quick takeaways.

• The theme is best suited for investors who are familiar with the healthcare theme, its potential and are willing to take the risk of a sectoral bias.  
• The healthcare story in India has been more of a momentum theme in the recent past and hence it would best suit investors willing to play the momentum game effectively. 
• This being a passive fund, it comes with a unique set of risks. It has the sectoral risk and the equity risk, but the fund manager selection risk is eliminated as the focus will only be on reducing the tracking error to the bare minimum. 
• Thematic stories may not fit into your portfolio targeted at long term goals. Hence use this fund as a passive means of generating alpha with a focus on the healthcare theme. 
• This fund is for the long term investor. The index is modified every six months, so it is an auto rebalancer. However, a time frame of 5-7 years and above is advisable.

This is suited to investors who understand the potential of the healthcare theme in terms of demand, market size and as an investment theme.

PERFORMANCE OF HEALTHCARE FUND PROXIES IN INDIA

Here is a quick look at the open ended healthcare Fund proxies in India as of April 19, 2024. These are CAGR returns for beyond 1 year, and pertain to direct plans. Also, there are active and passive plans in healthcare, but most passive plans do not have a vintage of more than 1 year, and hence may not add much value. As a result, we have restricted our proxy sample to just 10 funds which are active healthcare funds with a track record.

Scheme Name	1 Year (%) Returns	3 Year (%) Returns	5 Year (%) Returns	Launch (%) Returns	AUM (₹ Crore)
DSP Healthcare Fund	50.13	17.58	27.13	25.95	2,303.17
Aditya Birla Sun Life Pharma & Healthcare Fund	53.83	15.70	23.74	23.74	679.38
Mirae Asset Healthcare Fund	47.11	16.43	25.02	23.02	2,193.96
ICICI Prudential (P.H.D) Fund	57.12	18.59	25.21	22.39	3,757.80
LIC MF Healthcare Fund	44.00	12.13	20.05	19.82	61.61
Nippon India Pharma Fund	49.16	16.66	23.28	18.16	6,991.11
SBI Healthcare Opportunities Fund	51.06	18.81	23.98	17.76	2,596.62
UTI Healthcare Fund	47.82	15.09	21.73	15.55	933.35
ITI Pharma and Healthcare Fund	46.70	14.90	14.90	14.90	159.33
Tata India Pharma & Healthcare Fund	51.25	17.62	23.55	13.19	880.23

Data Source: AMFI India

In the table above, we have selected a cross section of 10 funds that represent healthcare funds as a proxy, although these are active funds while the Tata Nifty Midsmall Healthcare Index Fund is a passive fund. However, the risk profile is approximately the same. These comparisons are purely for the purpose of understanding. We have considered a total of 10 funds with a healthcare portfolio. Here are highlights of the performance of these funds.

• The return dispersion is fairly low and that is largely because this is built around the theme of pharmaceutical and healthcare stocks; which generally move in tandem. On a 1-year returns basis, healthcare funds in India generated maximum returns of 57.12% and minimum returns of 44.00%, showing rather limited variation due to the homogenous nature of healthcare theme. The average returns over a 1 year period are 49.82%, which is fairly impressive. However, it must be noted here that the said scheme is a passive healthcare scheme focused on mid-cap and small cap healthcare companies so the table above is purely suggestive and not exactly reflective.  
• Based on 3-year CAGR returns, the active healthcare funds in India generated maximum returns of 18.81% and minimum returns of 12.31%, showing a fairly low variation. The average returns CAGR over a 3-year period were 16.35%, a fairly impressive return. On 5-year CAGR basis, the open-ended active healthcare funds in India generated maximum returns of 27.13% and minimum returns of 14.90%, with the dispersion rising. The average returns CAGR over a 5-year period were 22.86%, again fairly impressive.  
• Finally, based on returns since launch, the proxies for healthcare funds in India generated maximum returns of 25.95% and minimum returns of 13.19%, showing fairly attractive base case returns. The average returns since launch were 19.45%. While these are proxies and not representative of the theme in totality, healthcare appears to be a relatively momentum theme with outperformance in the recent period.

The investment strategy would have to be a mix of momentum and value but the recent track record shows healthcare funds doing the best over a 1 year period.

GLANCE AT THE TATA NIFTY MIDSMALL HEALTHCARE INDEX FUND NFO

Here are some details of the Tata Nifty Midsmall Healthcare Index Fund NFO you must know to decide on investing in the fund.

1. The NFO of Tata Nifty Midsmall Healthcare Index Fund opens for subscription on April 08, 2024 and will close on April 22, 2024. Being an open-ended equity scheme, the fund will offer buy and sale at NAV linked prices and will reopen for sale and repurchase by April 30, 2024. While the fund has no lock-in period, it is best to hold such thematic funds for a period of 5-7 year or more to get full healthcare cycle benefits. 
2. On the Standard SEBI Risk-O-Meter, the Tata Nifty Midsmall Healthcare Index Fund will be ranked as a Very High Risk Fund, despite being a passive fund. The high risk is due to the predominant exposure to equities that the Tata Nifty Midsmall Healthcare Index Fund will have. In addition, there is also the risk of entering into the fund when the market is at all-time highs. Being a passive fund, the risk of managing the tracking error is also there; apart from the thematic bias. The mid-cap and small cap focus is an added risk factor in terms of capitalization volatility. 
3. The Tata Nifty Midsmall Healthcare Index Fund is about long term capital appreciation with the theme of healthcare to coincide with India seeing higher per capita healthcare spend and emerging as a destination for health tourism. The Tata Nifty Midsmall Healthcare Index Fund bets that healthcare spend will be coincidental with the growth of the Indian economy in the coming years and the rise in purchasing power of Indians. 
4. Investors can invest in the NFO of Tata Nifty Midsmall Healthcare Index Fund in minimum size of ₹5,000 and in multiples of ₹1 thereof. This also applies to switch-ins during the NFO and additional purchases. Exit loads will be charge at 0.25% of the redemption amount if redeemed or switched out within 15 days of allotment. Beyond 15 days, there is no exit load.  
5. The Tata Nifty Midsmall Healthcare Index Fund does not give any guarantee on returns, being a pure equity fund. The fund will maintain 80-100% exposure to equities, while the balance may be spread across debt, liquid assets, gold, and REITs. As the name of the fund suggests, it will be pegged to the Midsmall Cap Healthcare index, so the focus would be largely on reducing the tracking error in the fund. 
6. The Tata Nifty Midsmall Healthcare Index Fund NFO will offer the growth option as well as the IDCW (income distribution capital withdrawal) payout option. It will offer the facility to invest via the Regular Plan or through the Direct plan. The NAVs on redemption will be different for regular plans and dividend plans based on the TER imputed to the fund. The NAVs of growth plan and IDCW plan will differ to the extent of dividends declared. 
7. The fund is best suited for investors with a higher risk appetite and the ability to stay invested for a period of 5-7  years. Investors in the Tata Nifty Midsmall Healthcare Index Fund NFO must be prepared for the additional risk of thematic fund, since this fund is a big bet on the healthcare sector in India. 
8. The Tata Nifty Midsmall Healthcare Index Fund will be benchmarked to the Nifty Midsmall Healthcare Index TRI. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. This benchmarking is used to evaluate whether the fund is underperforming or outperforming the underlying benchmark. The fund manager for the Tata Nifty Midsmall Healthcare Index Fund will be Kapil Menon.  
9. The Tata Nifty Midsmall Healthcare Index Fund will be classified as an equity fund for tax purposes; with its equity exposure decisively above 65%. The short term capital gains (held for less 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% beyond a minimum threshold exemption of ₹1 Lakh per financial year.

The Tata Nifty Midsmall Healthcare Index Fund NFO is an opportunity for investors to participate in the robust India healthcare story comprising of pharmaceuticals, hospitals, diagnostics, and allied services. The fund offers a passive route to invest in the theme with the focus of the fund manager largely on minimizing the tracking error.p.