DSP Healthcare Fund Review – 99% Unbiased

DSP after their divorce from BlackRock has launched their first product DSP Healthcare Fund – let me be frank, I am disappointed.

I am not disappointed because they are launching this NFO because most of the AMCs do this in a bull market but… DSP in the last 2 years has taken a couple of decisions which are really progressive & ahead of the curve but launching a fund in a hot sector is regressive.

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DSP Healthcare Fund Review

Check this detailed Review & decide if this is a good idea to put your hard earned money in this fund. I am sure you will learn something new today. This post will cover

• Key Features
• Presentation of DSP Health Care NFO by AMC
• What’s unique in this fund
• NFOs and Sector Funds
• Why DSP Health Care Fund is Launched – their story vs my story
• Our clients’ exposure to pharma funds
• Our Analysis & verdict

Key features DSP Healthcare Fund

I don’t want to bore you with the fund features – you can check the presentation under these points

• The core investment will be equity and equity-related securities of healthcare and pharmaceutical companies.
• Some part of the investments will be allocated to international healthcare stocks
• The benchmark for the fund would be the S&P BSE Healthcare Index.
• It is an open-ended scheme fund

DSP Healthcare Fund Presentation

DSP Healthcare Fund – It’s (a bit) different

It’s not a pure sector fund – it’s a theme fund. (power fund vs infra fund) DSP’s fund will also have 25% exposure in the US healthcare stocks.

An NFO or New Fund Offer is an offer for investors to subscribe to a newly launched MF Scheme launched by a Mutual Fund House.

An NFO is marketed as an IPO but they are different. An IPO’s price is determined by demand and supply whereas the NFO scheme is priced at Rs. 10 and any number of units can be issued. It is used as a marketing device by Fund houses. It is a tool to get more investments.

It is risky to invest in NFOs on the basis of the ‘Low Price’. Moreover, there is no past performance to assess it.

Still, Mutual Funds awareness is low – lower NAV is mis-sold as something available cheap. I have seen Rs 10 NAV going down below Rs 2 – between most of those were sector funds like this new offering DSP Health Care Fund. (I am not saying this will go to 2)

My view about NFOs from last 15 years is consistent – check this post – Mutual Fund NFO (5 reasons why you should not invest)

Characteristics of Sectoral NFOs

A thematic or sectoral mutual fund scheme invests in one specific sector such as Banking or Pharma. For example, the sectoral fund, Reliance Banking Fund invests in equity, equity related or fixed income securities of banks and financial institutions. The sectoral fund – SBI Infrastructure Fund invests in companies engaged in infrastructure related activities.

A sectoral NFO is riskier as

• It invests only in one sector which means no diversification.
• The sector will go through different cycles and it will be difficult for the average investor to get the timing of purchase and sale right.

You will love to read Sector Fund Complete Guide

Why DSP Healthcare Fund is Launched

Their Story

• Capture the growing demand for healthcare in India, driven by factors like rising incomes, increasing awareness & ability to spend more on health
• Invest in not just today’s big healthcare companies, but even tomorrow’s potential leaders, which happen to be more reasonably valued today
• Give you access to even international healthcare stocks (especially large US companies), which historically have helped generate a greater return per unit of risk^#
• Benefit from this scheme’s fund managers’ global sector expertise, with a collective experience of 30+ years across the US, Latin America, Europe and India

So if you believe that the healthcare sector provides a compelling investment opportunity and are willing to remain invested for the long-term (given this is a sectoral equity theme and may have ups & downs in the short-term), consider DSP Healthcare Fund.

My Story

There’s a classic movie “Field of Dreams” – about an Iowa corn farmer (baseball fan) who hears a voice telling him: “If you build it, he will come.” (so he built a baseball ground in his field & then player came to play)

A similar situation is with our mutual fund industry – so they introduce fancy products in a heated market because they know if they have funds & sector is generating the superior return (even in short term) investors will shower dollars & they will earn more asset management fees.

But I haven’t seen many investors who made money in sector funds.

Classic Example of sector funds asset move – this is one of the infra related funds

Check – ICICI Prudential India Opportunities Fund NFO

Do you think investors made money in this fund? 

If you combine above graph & below graph (pink – infra related fund’s performance) – In 2006 & 2007 went up by 300% & assets went up by 12 times.

Clients existed when the fund was not performing – they made huge losses. They invested at top & withdrew at the bottom.

Average large & mid-cap (blue) fund made similar returns in this period.

Is Pharma Sector in Fancy

I think this graph can clarify – 10 years performance of the different type of funds.. Now someone can definitely argue that from last 3 years pharma sector has not performed – I agree.

• But will you be able to exit at peak?
• Why no pharma fund was launched between 2006 & 2012?
• Why you have not invested in pharma fund in 2008 & 2009?
• Do you think pharma funds will perform better (Risk & Return) than diversified equity fund in next 5 or 10 years?

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Our clients’ exposure to pharma funds

We introduced Reliance Pharma in the portfolio of few of our clients in 2009 & 2010 (depending on their risk profile – allocation was small). Even in my sister’s portfolio in 2009. But we exited by the end of 2014 & start of 2015 – that added some alpha.

You should only add sector funds when the risk-reward ratio is on your favor. Again we can debate on our smartness but you will find more details in the sector fund article that we wrote in 2011.

Existing Pharma Funds

Our Analysis and Verdict – DSP Health Care Fund

• The healthcare and pharma sector has been on a downward trend mainly because of exports going down and the pressure to reduce prices. There is increased competition and strict regulatory alerts and actions too.
• On the other hand, the demand for healthcare is rising. There is rising demand in preventive care and wellness care. The population of the elderly is growing. There are government initiatives like Ayushman Bharat that will drive up demand.
• NFOs, as mentioned earlier, have no proven track record, no rating and no diversification. This raises the investment risk.
• If you are a new investor who is not used to ups and downs of the market, it is better to avoid such funds. If you do invest but have a low-risk tolerance level, you should avoid the fund. Such investors can invest in diversified equity funds which will invest in the sector one is interested in and at the same time invest in other promising stocks and securities.

Unless you can manage big risks, you should avoid investing in DSP Pharma Fund or for that matter any sector fund..

Even if you are a seasoned investor or an aggressive investor who has done enough research to believe that the healthcare sector has potential to perform well and can invest for a long-term, you may take a SIP approach to invest in it rather than investing a lump sum amount.  If not, it is better to stay away from the fund.

Why did I say this review is 99% unbiased? Because we all are blinded by our biases 🙂

I will love to read your views on DSP Healthcare Fund in the comment section.