How to harness the potential of healthcare sector

By: |
May 13, 2021 12:43 PM

It is very likely that both the Centre and the State governments will be charting out plans to make huge investments in the healthcare sector, in the times ahead.

ETF as an investment vehicle is very cost effective as the fund management charges here are substantially lower when compared to an actively managed fund.

When it comes to investing, there is a general perception that Indian healthcare industry is expected to perform well over the coming decade. In this article I wish to explain why one should invest in the healthcare sector and how.

Why investment in health sector looks attractive

India and the world at large are in the midst of a pandemic that is showing no signs of receding anytime soon. Especially, in India the second wave of Coronavirus has been brutal. The speed at which the pandemic wreaked havoc through the country surprised and shocked one and all. Now, we are hearing ominous warnings about a probable third wave. All of these developments have brought to light the importance and inadequacies of the current medical infrastructure in the country. As a result, it is very likely that both the Centre and the State governments will be charting out plans to make huge investments in the healthcare sector, in the times ahead.

Even before the pandemic struck, the inadequacies in healthcare facilities were made evident in the Economic Survey for 2020-2021 which mentioned that a total of 15,99,870 lives were lost due to poor quality of healthcare in the country. One should be mindful of the fact that ramping up health infrastructure is not a short term task which can be completed in a few months. These healthcare infrastructure projects are likely to take years before they become fully operational to address the healthcare needs of citizens of the county.

At the same time, healthcare is a sector which needs to constantly innovate to remain relevant. These innovations are across the board ranging from diagnostics, treatment process to patient treatment methods. As a result, there is a constant need for investment in healthcare. Moreover, implementation of schemes like Ayushyaman Bharat Yojana is projected to increase demand not only for hospital infrastructure but also for allied services such as diagnostics and pharmaceutical products. All this put together will open up huge opportunities for the companies engaged in the healthcare space.

The potential of this sector is reflected in the fact that Nifty Healthcare Index has outperformed the benchmark Nifty 50 Index in 6 out of the previous 10 calendar years. (Data as on March 31, 2021). In investing terms, this trend clearly points to the potential upside the healthcare sector could provide.

How one can invest in healthcare sector

Since healthcare infrastructure comprises of various activities related with delivering healthcare services, there is a wide range of companies one can consider investing in. Given the multitude of options available, it is not easy for an average investor to identify and invest in companies which hold potentials to perform better.

In order to measure performance of various sectors, stock exchanges – NSE and BSE – have devised various indexes. In order to measure the performance of health care sector, the NSE has Nifty Healthcare Index. The Nifty Healthcare index represents various companies engaged in manufacturing of pharmaceutical products, diagnostics, medical equipment and tools and those running hospitals. The index consists of 20 leading companies engaged in the above four segments of healthcare.

Since a retail investor can neither invest in the index directly nor clutter the portfolio with all the constituent companies of the index, mutual fund houses today are offering passive investment choices which imitate various indexes. In order to cater to the needs of investors looking to invest in the healthcare sector, ICICI Prudential Mutual Fund has come out with a new fund offer of Nifty Healthcare Index Exchange Traded Exchange (ETF). This ETF offers an investor the opportunity to take exposure to all the top 20 companies of the sector in an easy and simple manner.

Why invest through ETF

ETFs are passive funds which are designed to mimic an index. With active funds coming under pressure in terms of beating benchmarks consistently, investors are increasingly investing through passive funds with lower costs. Globally, ETF asset under management has gone up from $1,313 billion in 2010 to $7,336 billion in 2020, representing CAGR of 18.77%.

ETF as an investment vehicle is very cost effective as the fund management charges here are substantially lower when compared to an actively managed fund. The other advantage is that ETFs are traded on stock exchanges on real-time basis, capturing the underlying current in a sector at any given point in time during the trading hours. This offers an astute investor the opportunity to reap gains, especially on days when equity market is extremely volatile. Such an opportunity is not available when investing through mutual fund schemes. This is because in case of mutual funds, any transaction is done at a single NAV which is arrived at the end of the trading hour of the day.

ETF Taxation

Since ICICI Prudential Healthcare ETF is an equity-oriented scheme, any capital gains made on transfer/sale of these ETFs within one year shall be taxed at 15% and shall be eligible for rebate under Section 87A in case the total taxable income of an individual does not exceed Rs 5 lakh. The profits made on selling these ETF units after 12 months shall be taxed at a flat rate of 10% after initial exemption of Rs 1 lakh. This initial exemption (Rs 1 lakh) is available on aggregate profits made on all listed shares and equity-oriented mutual funds schemes like this ETF taken together.

(The writer is a tax and investment expert, and can be reached at jainbalwant@gmail.com)

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