Why should you invest in a health and wellness fund?

Posted On: 28 August 2024

When you invest in equity mutual funds, you get the opportunity to participate in the country’s growth. You can potentially build wealth in the long term as stock prices appreciate, which is the result of companies doing well and the economy being healthy.

One way to tap into these opportunities is through diversified equity funds, which invest across sectors. Another way to do so is to focus your investment on a particular theme, such as technology, healthcare, energy, or finance.

Sectoral/thematic mutual funds, as the name suggests, invest in companies operating within a particular sector or a group of sectors that follow a theme. This allows investors to capitalise on the potential growth within that space. If those sectors or themes outperform the broader market, such a strategy can potentially yield higher returns. However, a thematic or sectoral investing approach results in higher risk.

Thus, when investing in thematic funds, it is essential to identify industries that have the potential to show long-term growth. One such theme is health and wellness, which comprises several services that are required across market cycles. This article tells you more about the potential benefits and risks of thematic funds focusing on health and wellness, and factors to consider before investing.

Table of contents

What is healthcare?
What are the different sectors in the healthcare space?
The wellness industry
Benefits of investing in health and wellness-related sectors
Risks of investing in thematic funds
Conclusion

What is healthcare?

Health is a broad segment that includes everything related to health and medical services. It is made up of various sectors and companies that provide medical services, manufacture medical equipment, develop pharmaceuticals, and offer health insurance.

Among other things, healthcare can include:

Hospitals and clinics
Pharmaceutical companies (that manufacture medicines)
Medical device manufacturers (that manufacture equipment like X-ray machines and stethoscopes)
Health insurance companies
Biotech companies (that research and develop new treatments)

Each of these areas plays a critical role in keeping people healthy, which is why healthcare-related sectors are frequently in demand.

What are the different sectors in the healthcare space?

When you invest in a healthcare fund, your money is usually spread across various sectors, which helps in reducing risk. Here are some of the prominent health-related sectors:

Pharmaceuticals: Companies that produce medicines and vaccines.
Biotechnology: Companies involved in the research and development of new drugs and treatments.
Healthcare providers and services: This includes hospitals, clinics, and companies that offer healthcare services.
Medical devices: Companies that produce medical equipment like pacemakers, MRI machines, and surgical instruments.
Health insurance: Companies that provide health insurance to individuals and organisations.

The wellness industry

Another segment closely aligned with health is wellness, which has been surging in popularity in recent years. Driven by increasing consumer awareness of health and well-being, the wellness space includes sectors such as personal care, fitness and nutrition, mindfulness, and alternative medicine. As people prioritise a balanced and healthy lifestyle, the demand for wellness products and services continues to surge. This growth is further fuelled by technological advancements, making wellness more accessible through apps, wearables, and online platforms.

Benefits of investing in health and wellness-related sectors

Let’s now discuss some reasons why you can consider investing in a health and wellness-themed fund:

Growing demand for health and wellness: One of the main reasons to consider investing in health and wellness is the growing demand for these. As the population ages and life expectancy increases, more people require medical care. As the focus on quality of life increases, wellness too shows prospects for growth. This growing demand is driven by demographic trends such as an aging population, which generally requires more medical care, medications, and long-term care services. Additionally, advancements in medical technology continually create new treatments and healthcare solutions.
Investment opportunities: Investing in a thematic fund gives you exposure to a wide range of sectors within its ambit. This diversity can be beneficial because if one area (like pharmaceuticals) isn’t doing well, another area (like medical devices) might be performing better. This spread of investments can help reduce risk and increase the chances of earning good returns over time.
Innovation and health tech advancements: Businesses related to health and wellness are constantly evolving, with new treatments, drugs, and cutting-edge technologies being developed regularly. Companies often invest heavily in research and development (R&D) to bring innovative products to the market. Significant advancements include telemedicine, wearable health devices, artificial intelligence (AI) in diagnostics, and personalised medicine.
Defensive investment: Another reason to invest in health and wellness-related industries is that some of them can be considered a defensive investment. Defensive investments are those that have the potential to perform well or display relative stability even when the economy is underperforming. For instance, people will always need healthcare, no matter what the economic conditions are. This can make health-related investments relatively resilient during economic downturns.
Long-term growth potential: Health and wellness have significant long-term growth potential, owing to an increasing focus on health and well-being, along with technological advancements and the need for better healthcare solutions.
Rise in medical costs: As healthcare services, treatments, and technologies become more advanced, the costs associated with them also increase. This increase in expenses can create a greater demand for health insurance, medications, and advanced medical treatments, all of which contribute to the growth of the health and wellness space.
Being prepared for future health crises: The recent global pandemic has reminded us of the critical importance of healthcare infrastructure, research, and preparedness. Governments and organisations around the world are now more focused on strengthening healthcare systems, increasing research into vaccines and treatments, and ensuring readiness for future health crises. This increased focus has led to greater investments in healthcare, making these sectors more robust.

Risks of investing in thematic funds

Despite these benefits, thematic funds can entail higher risks than diversified equity funds. These include:

Concentration risk: Unlike broad-based funds, thematic funds focus on a narrow set of industries or themes, limiting diversification. This increases the risk as the performance of the fund heavily depends on the chosen theme.
Industry-specific risks: Thematic funds are exposed to risks specific to the sectors they invest in, such as regulatory changes, patent expirations, and government policy shifts. New regulations can impact the profitability of companies within this sector or cause temporary disruptions in the market. Hence, careful stock selection by the fund manager is essential, as is having a long investment horizon that can potentially tide over short-term volatilities and sectoral flux.
Global factors: Health and wellness are global services, and international events, such as changes in healthcare policies or economic downturns in key markets, can impact the performance of sectors within their ambit, posing a risk to investors.

Here are some ways to mitigate risks while investing in thematic funds:

Diversify: Hold a diversified portfolio that includes not just one or a few thematic funds but also more diversified avenues that can potentially offer more stability, such as debt funds, hybrid funds, and large-cap funds.
Research thoroughly: Before investing, conduct thorough research on the chosen theme. Understand the industry trends, key drivers, and potential challenges. Stay informed about regulatory changes, technological advancements, and economic conditions that could impact the performance of relevant sectors within that theme.
Invest for the long term: Thematic funds can be volatile in the short term, so it's essential to have a long-term investment horizon. This approach allows you to ride out short-term fluctuations.
Regular portfolio review: Regularly review your portfolio to assess the performance of your thematic funds. Be prepared to rebalance or exit the fund if the outlook for the sectors within that theme changes or if the fund's performance consistently lags.
Consult a financial advisor: Seek guidance from a financial advisor to ensure your investment in thematic funds aligns with your risk tolerance, financial goals, and overall investment strategy.

Conclusion

Sectors within the health and wellness theme are vast and diverse. Many of these are also essential to our daily lives. With growing demand, opportunities for innovation, and long-term growth potential, health and wellness-themed funds can be a suitable addition to your investment portfolio. However, like all investments, it’s essential to consider the risks and do your research before investing. If you’re a beginner, you may consider starting with a small investment and learning more as you go. Consulting with a financial advisor is always recommended for investments.

FAQs

Which factors should I consider before investing in thematic funds?

Before investing, consider your investment goals, risk tolerance, and the performance of the fund you’re interested in. It’s also essential to understand the specific areas of the sectors that the fund invests in, such as pharmaceuticals, biotechnology, or medical devices.

How can I invest in thematic funds?

You can invest in a healthcare thematic mutual fund directly through the asset management scheme whose scheme you have selected. You can also go through a distributor or an aggregator.

Are healthcare-based funds stable investments?

All equity investments entail high risk and sectoral/thematic funds carry the additional risk of concentration, as the fund’s return potential hinges on a single industry. However, the healthcare segment offers growth opportunities as it comprises several essential services that are necessary across market conditions. It’s also important to diversify your portfolio to include less risky investment avenues such as debt funds, hybrid funds, and large-cap funds.

What are the benefits of investing in health and wellness funds?

The main benefits include exposure to growing sectors, diversification across different companies, the potential for long-term growth, and potentially defensive characteristics during economic downturns.

What are the risks involved in healthcare investments?

Risks include changes in healthcare regulations, high research and development costs, and competition within health-related sectors. Additionally, the performance of healthcare investments can be affected by economic conditions and market volatility.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.