Motilal Oswal Nifty MidSmall Healthcare Index Fund: A Healthy Proposition for Your Portfolio?

In the endeavour to build its passive product basket, Motilal Oswal Mutual Fund has launched a series of index funds of late. One more to the stable of the fund house is the Motilal Oswal Nifty MidSmall Healthcare Index Fund.

It is an open-ended equity fund replicating/tracking the Nifty MidSmall Healthcare Total Return Index.

The Scheme aims to invest in mid and small cap stocks from the healthcare sector in India, including pharmaceuticals, biotechnology, healthcare services, and medical devices. The Scheme aims to provide returns that correspond to the performance of the Nifty MidSmall Healthcare Index.

During the NFO period, the scheme is open for subscription from October 29, 2025, to November 6, 2024. Thereafter the Scheme will re-open for subscription on November 19, 2024.

The healthcare sector in India, as you may know, has been one of the fastest-growing sectors in recent years. Several healthcare companies have demonstrated appealing performance as regards revenue and profit growth. The mid and small cap companies from the pharma & healthcare sector also have contributed to the growth.

[Read: The Future for Pharma & Healthcare Looks Bright. Here Are 6 Mutual Funds to Invest in]

Hence, certain Pharma & Healthcare Funds have delivered over 40% returns on a year-to-date (YTD) basis and over the last 3 years, have clocked a compounded annualised growth rate (CAGR) of over 20% (as of November 4, 2024).

The pharma & healthcare sector, which is defensive by nature, in general, has remained largely resilient and the outlook also seems positive. There is an ongoing demand for healthcare, the government's initiatives such as Ayushman Bharat have increased healthcare access and affordability, India's public expenditure on healthcare is slowly increasing (as outlined in the National Health Policy 2017, the government aims to increase public health spending to 2.5% of GDP by 2025, from 1.9% of GDP as of 2023-24), and technological advancement in healthcare is evident.

Given this, the exposure of the healthcare sector to the Nifty 500 Index has also increased since 2019.

That being said, the launch of Motilal Oswal Nifty MidSmall Healthcare Index Fund comes at a time when the mid & small cap segments of the Indian equity market are at lofty valuations.

Motilal Oswal Nifty MidSmall Healthcare Index Fund has the mandate to invest 95% to 100% of its total assets in the constituents of the Nifty MidSmall Healthcare Index.

The Scheme, in general, will hold all the securities that comprise of underlying Index in the same proportion as the index. The expectation is that, over a period of time, the tracking error of the Scheme relative to the performance of the Underlying Index will be relatively low.

The investment manager would monitor the tracking error of the Scheme on an ongoing basis and would seek to minimize tracking error to the maximum extent possible. There can be no assurance or guarantee that the Scheme will achieve any particular level of tracking error relative to the performance of the underlying index.

The Scheme may take exposure to equity derivatives of the index itself or its constituent stocks (for non-hedging purposes) when equity shares are unavailable, insufficient or for rebalancing in case of corporate actions for a temporary period. Other than for the said purposes, the Scheme will not invest in equity derivatives.

These investments in derivatives would be for a short period of time i.e. days. The exposure towards equity derivatives instruments shall not exceed 20% of the net assets of the Scheme. If the exposure falls outside the asset allocation pattern, the portfolio would be rebalanced by AMC within 7 days from the date of said deviation. The fund shall not write options or purchase instruments with embedded written options. When the constituent's securities of the underlying index are available again, derivative positions in these securities would be unwound.

The Scheme may engage in securities/stock lending of not more than 20% of the net assets of the Scheme and not more than 5% of the net assets of the Scheme can generally be deployed in stock lending to any single counterparty.

The Scheme would hold up to 5% of its total assets in units of Liquid Schemes and money market instruments.

Money market instruments include Commercial Papers (CPs), Commercial bills, Treasury bills (T-bills), Government securities (G-secs) having an unexpired maturity of up to one year, Tri-Party Repos, certificate of deposit, usance bills and any other like instruments as specified by the RBI from time to time.

The scheme may invest in their own mutual fund Schemes or other mutual fund schemes.

The pending deployment of funds as per investment objective may be parked in short-term deposits of scheduled commercial banks, subject to guidelines and limits specified by SEBI.

Motilal Oswal Nifty MidSmall Healthcare Index Fund shall not indulge in the following:

• Investment in securitised debt

• AT1 and AT2 bonds

• Unrated debt securities

• Repo in corporate debt and corporate reverse repo

• Credit Default Swaps (CDS)

• Structured Obligations (Sos) or Credit Enhancements (CEs)

• Overseas Securities/ ADR & GDRs

• REITs or InVITs

• Short selling of securities

What is the Investment Objective?

The investment objective of Motilal Oswal Nifty MidSmall Healthcare Index Fund is to provide returns that, before expenses, correspond to the total returns of the securities as represented by the Nifty MidSmall Healthcare Total Return Index, subject to tracking error.

However, there can be no assurance or guarantee that the investment objectives of the scheme will be achieved.

What is the Investment Strategy?

The investment strategy would be Passive in nature offering investment returns that are similar to the total returns of Nifty MidSmall Healthcare Total Return Index before fees/expense and subject to tracking error.

Tracking error may arise due to the following reasons:

1. Fees and expenses of the Scheme

2. Cash balance held by the Scheme due to dividends received, subscriptions, redemption, etc.

3. Halt in trading on the stock exchange due to circuit filter rules

4. Corporate actions

5. The Scheme has to invest in the securities in whole numbers and has to round off the quantity of securities shares.

6. Delay in dividend payout, and withholding tax on dividend

7. Changes in the constituents of the underlying Index. Whenever there are any changes, the Scheme will reallocate its investment as per the revised Index, but market conditions may not offer an opportunity to rebalance its portfolio to match the Index and such delay may affect the NAV of the Scheme.

8. Lack of Liquidity

The AMC would monitor the tracking error of the Scheme on an ongoing basis and would seek to minimize tracking error to the maximum extent possible.

Under normal market circumstances, such tracking error is not expected to exceed by 2% p.a. In case of unavoidable circumstances like force majeure, which are beyond the control of the AMC, the tracking error may exceed 2% and the same will be intimated to the Trustees with corrective actions taken by the AMC, if any.

Broadly, the scheme aims to invest in the constituent of the Nifty MidSmall Healthcare Total Return Index, in the range of 95% to 100% and units of Liquid schemes/ debt schemes, debt and/or money market instruments, in the range of 0% to 5%.

Also, subject to the SEBI regulations as applicable from time to time, the Scheme may participate in securities lending.

The Scheme will benchmark its performance against the Nifty MidSmall Healthcare Total Return Index (TRI).

About the Nifty MidSmall Healthcare Index

This Index (launched on August 3, 2022, with the base date as April 1, 2005) tracks the performance of midcap and small cap stocks belonging to the healthcare sector. The Index includes up to 30 stocks and is reconstituted semi-annually while rebalanced quarterly.

Stocks forming part or going to form part of the Nifty MidSmallcap 400 index at the time of review are eligible for inclusion in the index. Stock weights are based on free-float market capitalisation.

This index is designed in such a way that the weight of no single stock shall be more than 33% and the weights of the top 3 stocks cumulatively shall not be more than 62% at the time of rebalancing.

The Nifty MidSmall Healthcare Index is relatively better diversified compared to the Nifty Healthcare Index, which has exposure to heavyweight pharma & healthcare companies.

Since the base date of April 1, 2005, the Nifty MidSmall Healthcare Index has clocked a price return of 21.1% CAGR and a total return (which includes dividends) of 22.2% (as of October 31, 2024).

In the last 5 years, the Nifty MidSmall Healthcare Index created wealth for an appealing pace with a price return of 27.0% CAGR and a total return of 27.9% CAGR (as of October 31, 2024).

After moving nearly flat for around three years before the COVID-19 pandemic, the Nifty MidSmall Healthcare Index has moved up sharply - more so since 2023. It has been among the top-performing sectors in the last one year, and important to note that the outperformance is on the back of exposure to mid and small cap companies.

Who Will Manage Motilal Oswal Nifty MidSmall Healthcare Index Fund?

The equity portion of the Scheme will be managed by Mr Swapnil Mayekar, whereas the debt portion of the portfolio by Mr Rakesh Shetty.

Swapnil has over 13 years of experience in fund management and product development and currently is the Vice President - Fund Manager at Motilal Oswal Asset Management Company Ltd. He has been with the AMC since March 2010.

He holds a master's degree in commerce (M.Com) and a post-graduate advanced diploma in business administration.

His skillset lies in index investing and Exchange Traded Funds (ETFs). At Motilal Oswal Mutual Fund he manages various index funds and ETFs.

Mr Rakesh Shetty is a commerce graduate (B.Com) and an MBA (Finance). He has more than 14 years of overall experience and expertise in trading in equity, debt segment, ETF management, Corporate Treasury and Banking.

Before joining Motilal Oswal Asset Management Company Ltd, he worked with a company engaged in Capital Market Business wherein he was in charge of equity and debt ETFs, customised indices, and has also been part of product development. At Motilal Oswal Mutual Fund, Rakesh as Fund Manager - Fixed Income, co-manages a variety of schemes.

How Much is the Minimum Investment in Motilal Oswal Nifty MidSmall Healthcare Index Fund?

During NFO and on a continuous basis, the minimum lump sum investment in Motilal Oswal Nifty MidSmall Healthcare Index Fund is Rs 500/- and in multiples of Re. 1/- thereafter.

In the case of the Systematic Investment Plan (SIP), for the daily SIP, the minimum investment is Rs 100/- and multiple of Re 1/- thereafter (minimum instalments: 30 days).

For the weekly, fortnightly, and monthly SIPs the minimum investment amount is Rs 500/- and multiple of Re 1/- thereafter (minimum instalments: 12).

In the case of the quarterly SIP option, the minimum investment amount is Rs 1,500/- and multiple of Re. 1/- thereafter (minimum instalments: 4).

And for annual SIP the minimum SIP investment amount is Rs 6,000/- and multiple of Re 1/- thereafter.

Motilal Oswal Nifty MidSmall Healthcare Index Fund offers Regular and Direct Plans with a Growth option.

[Read: IDCW vs Growth Option: Which One Should You Opt for?]

Who Should Consider Investing in Motilal Oswal Nifty MidSmall Healthcare Index Fund?

Investors looking forward to exposure to a defensive sector such as pharma & healthcare, who have the stomach for very high risk for sector & thematic index funds, have a long-term investment horizon of 7-8 years or so, and want returns that shall commensurate with that of the Nifty MidSmall Healthcare Index, may consider investing in this Scheme (for the satellite portion of the mutual fund portfolio).

Note the fortune of the scheme will be closely linked with the pharma & healthcare sector and the mid and small cap companies of the sector. If the sector faces sector-specific challenges, it could weigh on the returns of the Scheme.

Keep in mind that the small and midcap stocks of the Indian equity market are trading at lofty valuations, much higher than the large caps. Even though the Indian equity has corrected since the lifetime high, it is not greater than 10% from the peak and valuations still are expensive. Indian equities continue to command a premium compared to global peers.

Now while some may justify the premium that Indian equities command relative to global peers as India is the fastest-growing major economy (at the fifth spot), in my view, given the market risk involved due to geopolitical and economic uncertainty, it is not a very conducive environment to make fresh invest in mid caps and small caps even if you have a very high-risk appetite.

The margin of safety is not very comforting at this juncture, particularly in the mid and smallcap segment, and you will be exposed to high concentration risk when investing in the Motilal Oswal Nifty MidSmall Healthcare Index Fund.

To learn more about the Motilal Oswal Nifty MidSmall Healthcare Index Fund, read the Scheme Information Document and Key Information Memorandum.

You need to avoid getting swayed by irrational exuberance. Invest sensibly.

Be a thoughtful investor.

Happy Investing!