Kotak Mutual Fund launches healthcare fund. Should you invest?

Data shows that the Nifty 500 index – a diversified index - has relatively small exposure to the healthcare sector.

Kotak Mahindra Asset Management Company Ltd has launched an open-ended healthcare fund that will invest in pharma, healthcare, and allied sector themes. The new scheme opened on November 20.

Kotak Healthcare Fund (KHF) would be the 13th active fund that would focus on the healthcare theme. The scheme would be benchmarked against the Nifty Healthcare Index, and the fund managers would be Shibani Sircar Kurian and Dhananjay Tikariha.

Kurian also manages Banking and Financial Services, Focused Equity, and India EQ Contra funds at Kotak AMC, while Tikariha has 17 years of industry experience and specialises in healthcare and pharma.

Notably, in the past five months, two new schemes, HDFC Pharma & Healthcare and Quant Healthcare, have been launched on this theme.

Scheme design

The investment strategy for the fund will be bottom-up in nature, within the pharma, healthcare, and allied sectors theme. The fund will seek to identify companies that fit into the AMC’s investment philosophy of growth at a reasonable price (GARP) using its Business, Management, and Valuation (BMV) framework.

Within the BMV framework, the fund house focuses on business scalability and sustainability, management quality and corporate governance, and valuation parameters.

The scheme can take up to 20 percent exposure to overseas mutual fund schemes, exchange-traded funds (ETFs), or foreign securities. Arjun Khanna will be the dedicated fund manager for investments in foreign securities.

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Like any typical sector or thematic fund, KHF will invest in companies across market capitalisations.

Healthcare setup

Healthcare as an investment theme in India includes diverse businesses and sub-sectors. It comprises domestic formulations, generic formulation exports, contract development and manufacturing (CDMO), speciality pharma, active pharmaceutical ingredients (APIs), hospitals, diagnostics plays, medical equipment, and health insurance, among others.

“While the generic pharma opportunity remains large, the Indian healthcare sector is now poised for the next leap of growth by tapping into the opportunity of supplying speciality drugs and high-end tertiary hospital care. In the case of speciality drugs, innovation could result in huge potential. Medical tourism in India is growing, and the country has emerged as an affordable and quality treatment location for people around the world,” said Shibani Sircar Kurian, Senior Executive Vice President, Fund Manager, and Head – Equity Research, Kotak Mahindra AMC.

Data shows that the Nifty 500 index – a diversified index - has relatively small exposure to the healthcare sector.

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"Hence, investing in a healthcare fund offers the best way to benefit from the structural growth opportunity. Further, in terms of valuations, the healthcare segment is trading at reasonable multiples, which are in line with long-term averages,” adds Kurian.

Should you invest?

“We expect the Kotak Healthcare Fund to utilise the mandate's flexibility to invest in sunrise pockets and select companies with a bottom-up, stock-specific approach while being agnostic to any market-cap or sub-segment-related targets. The fund appears promising, and an allocation within the overall portfolio could yield reasonably strong performance from a medium-term standpoint. Investors must be cognizant of the cyclical nature of the fund, considering its concentration within the sector,” said Nirav Karkera, Head of Research at Fisdom.

On a one-year basis, active pharma mutual funds have delivered an average return of 25 percent until November 16. On three- and five-year basis, returns have been 15 percent and 19 percent, respectively.

“Healthcare in India is one of the fastest-growing sectors in the economy. This growth is being driven by a number of factors, including an ageing population, rising disposable incomes, and increasing government spending on healthcare. As a result of these factors, the healthcare sector is expected to continue to grow at a strong rate in the coming years,” said Viral Bhatt, Founder, Money Mantra.

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However, keep in mind that choosing the right fund is key when it comes to sectoral funds. Data available with ACE MF shows that the best-performing scheme over the last one year is the ICICI Prudential Pharma Healthcare & Diagnostics Fund, with a return of 29 percent till November 16. LIC MF Healthcare Fund on the other hand has delivered 16 percent returns during the same period.

Keep in mind that the fund's performance in the past year is not necessarily indicative of its future performance.

“Kotak Healthcare Fund is a good investment option for investors who are looking for long-term capital appreciation. The fund house has a strong investment strategy and a well-experienced manager. However, investors should note that the healthcare sector is a cyclical sector and can be volatile in the short term,” said Bhatt.

New investors, who are entering the equity markets for the first time or those still building their portfolios, can avoid KHF. But if your core portfolio is well-built, you can consider thematic or sector funds, provided you fulfil these two conditions; you should have the high-risk appetite that comes with such schemes and you should have a positive view on the sector that such funds track. But schemes that come with a track record are always preferred, till new launches establish themselves.