Mutual Funds

DSP Healthcare Fund: A bet on the possible recovery of pharma

Dhuraivel Gunasekaran | Updated on November 18, 2018 Published on November 18, 2018

The fund plans to invest up to 25% in international healthcare stocks

A new fund offer (NFO) from DSP Mutual Fund — DSP Healthcare Fund — expects to benefit from the growth potential in the healthcare sector. Investing primarily in the stocks of domestic healthcare and pharma sector, the fund also plans to invest up to 25 per cent in international healthcare stocks, especially large US companies. The NFO closes on November 26.

Investment strategy

Though it is a sector fund, DSP Healthcare expects to diversify its risks by investing across companies with differentiated focusses, operating in distinct markets and in related sub-sectors. The fund proposes to allocate 30-40 per cent of its assets in domestic-focussed pharma companies, 10-20 per cent in export-focussed firms, 10-20 per cent in innovation-led generic companies, 5-15 per cent in firms involved in contract research and manufacturing, and up to 10 per cent each in hospitals, diagnostic laboratories and health insurance companies.

The allocation of up to 25 per cent in US healthcare equities also helps diversify the portfolio risk. Though a multi-cap-oriented fund, the fund is expected to lean towards mid- and small-cap stocks.

Industry outlook

After a commendable performance until 2015, the Indian healthcare sector has been facing multiple headwinds, both in the domestic and global markets. Regulatory overhang and price erosion of primary drugs in key markets have weighed on the stocks of Indian pharma companies.

Companies focussing on the US market have been particularly hit hard due to stringent action by the US drug regulator Food and Drug Administration (FDA) along with structural issues in the US, including rising competition, consolidation of channel partners, price erosion, and lack of new opportunities.

However, performance in recent quarters indicate a turnaround in the fortunes of the sector. Subsiding regulatory woes, healthy revenue growth in key markets and recovery in domestic market post the GST disruption, are key positives for the sector.

The Indian pharma sector is also expected to consolidate and ramp up growth in the next three-five years. Ayushman Bharat (National Health Protection Scheme) is also expected to offer growth opportunities for hospitals, and increase healthcare awareness, providing a leg-up for health insurance companies.

It is worth noting that the valuation multiples of many pharma companies are below, or close to, their long-term average multiples due to de-rating in the past two to three years.

Existing funds

Currently, there are six schemes under the pharma sector category, investing primarily in domestic pharma companies. These funds have managed to outperform healthcare indices. The category clocked 11 per cent and 20 per cent compounded annualised returns over the past five- and 10-year periods, respectively, while the S&P BSE Healthcare index TRI posted 9 and 18 per cent.

Reliance Pharma — a flagship fund under the category — has demonstrated commendable performance even in the recent downturn (14 per cent in the last one year, while peers and the benchmark registered single-digit or negative returns), thanks to prudent stock picking.

The recently launched ICICI Prudential Pharma Healthcare and Diagnostics Fund follows the same investment strategy.

The NFO - DSP Healthcare Fund is the only fund that proposes to allocate up to 25 per cent to international equities.

Our take

Sector funds are risky, given their focus on a single sector and concentrated investment approach. Their performance is cyclical in nature and is dependent on the fortunes of the sector. That said, high-risk investors looking to diversify their portfolio and wanting to bet on the possible recovery in the pharma sector can consider healthcare funds.

With six funds already available in the market with a long track record, it is always advisable to go for such funds, rather than bet on a new fund. Aside from the partial allocation to US equities, DSP Healthcare Fund does not offer anything new for investors.

That said, the fund will be managed by Aditya Khemka and Vinit Sambre. Sambre is known for his sharp stock-picking acumen, particularly in the mid- and small-cap space, and has been the driving force behind DSP Small Cap’s (formerly DSP Micro Cap) stellar performance.

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