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Pharma sector mutual funds invest predominantly in stocks of companies belonging to the pharma sector. Such sector funds lack diversification of portfolio for an investor. Investors must consider this before investing.
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Pharma mutual funds are a type of equity fund that invests primarily in equity-linked instruments belonging to the pharmaceutical and healthcare sectors. Investing in these funds gives exposure to a range of major pharmaceutical companies, hospital management firms, Health Maintenance Organisations (HMO), biotechnology companies, etc.
According to SEBI regulations, sector mutual funds must invest about 80% of their assets in specific sectors. Irrespective of the sector’s performance, the fund is obligated to stay invested in the theme or sector. The fund manager cannot invest elsewhere if the sector experiences a downturn. Therefore, while investing in a sector fund, you are signing up for such a risk. Pharma mutual funds are sectoral funds, which means they invest a large amount of their assets in the stocks of companies involved in a specific industry. As a result, these schemes are extremely risky.
The best pharma funds are the ones that have consistently outperformed their peers and benchmark indices.
Recommended: To check best mutual funds to invest
Following are the key advantages of investing in pharma mutual funds:
Pharma Funds are a potential choice if you want to invest in the pharmaceutical and healthcare sector. The demand for healthcare services is steadily expanding, and the growth prospects look promising.
The AMCs are always on the lookout for companies that have either invented new pharmaceuticals or have been doing so for a long time in order to improve people’s health and life expectancy. Pharma Funds primarily invest in pharmaceutical firms that are constantly progressing, ensuring that investors’ money is safe.
However, pharma funds are sectoral funds. Since these funds primarily invest in one industry, they lack sector diversity, which is why they are high-risk investments. If the sector falls, the portfolio’s stocks will also decline, with nothing to cushion the blow. Only experienced investors should invest in these funds. Moreover, even if you are well versed with the industry and its dynamics, exposure beyond 10% to your portfolio is not recommended.
The Indian Pharma industry may look promising; however, you should be careful while choosing a scheme to invest in. Following are some parameters that will help you select the best pharma mutual fund for investment:
The pharmaceutical industry may have good growth prospects as a result of government actions. In addition, a strong dollar and pharma companies’ cost-cutting efforts may boost profits in the coming years. Despite the COVID pandemic, pharma indexes have been steadily climbing, indicating that the industry is reviving. As a result, the sector may witness good steady growth.
The historical performance of a pharma fund doesn’t guarantee future returns. However, analyzing the fund’s returns against its benchmark and peers will help you understand its performance. Funds that have consistently outperformed their benchmark and peers are good investment options. Furthermore, analyzing historical returns will help you understand the fund manager’s performance and the fund’s performance across different market cycles.
Pharma mutual funds aim to take advantage of the pharmaceutical industry’s long-term growth potential to build long-term wealth. Stocks are hand-picked by the fund manager based on a company’s track record, management, growth prospects, and overall industry situation. To keep risk at a minimum, the fund manager creates a well-diversified portfolio within the pharmaceutical sector.
Pharma funds are equity schemes and therefore require a long-term investment duration to generate significant returns. Consider investing in a pharma fund only if you have a long-term investment horizon. Equity schemes are often highly volatile in the short term.
Pharma mutual funds are ideal for aggressive investors who have a good understanding of the pharma industry. These funds are worth considering if you want to diversify your total portfolio and stay invested for a long time. Therefore, assess the suitability of the sector and the funds to your investment portfolio, goals and horizon.
Since Pharma funds are sector funds, their portfolio has high exposure to stocks from the pharmaceutical industry, making it a high-risk investment. In addition, fluctuations in the underlying stocks may cause the fund’s returns to fluctuate. As a result, investors should analyse broad criteria such as current industry trends, the fund manager’s track record, and portfolio composition before investing in the fund.
Even though the pharmaceutical industry is performing well right now, its growth may not be entirely cyclical. However, it can be susceptible to market pressures. Therefore, if you are an investor who understands the sector in-depth and is willing to undertake the volatility, you can consider investing in pharma mutual funds.
The Indian Pharmaceutical sector is the world’s third-largest in terms of volume and 14th largest in terms of its value. It accounts for 3.5% of all medications and medicines exported worldwide. The sector currently accounts for 1.72% of the country’s GDP and is expected to grow at a rate of 10% to 12% per year. Furthermore, India has the second-highest number of FDA-approved plants next to the USA.
India is the world’s top supplier of generic pharmaceutical medicines. Moreover, the country’s manufacturing costs are 33% cheaper than in Western markets. Indian medications are preferred all over the world, earning the country the title of ‘Pharmacy of the World.’
The pharmaceutical sector is one of India’s top ten industries attracting foreign investment. By 2024, the Indian pharmaceutical industry is expected to be worth USD 65 billion, and by 2030 USD 120-130 billion. India sells pharmaceuticals to almost 200 countries throughout the world, including the highly regulated markets of the United States, West Europe, Japan, and Australia.
100% FDI is allowed through the automatic route for Greenfield pharmaceuticals projects. While for Brownfield pharmaceutical projects, up to 74% through the automated route and for higher investments, government approval is required.
The Department of Pharmaceuticals has a total budget allocation of INR 2,244.15 crore for FY 2022-23.
For the Department of Health and Family Welfare, the budgetary allocation for FY 2022-23 is INR 83,000 crore.
On the other hand, the Department of Health Research budgetary allocation for FY 2022-23 is INR 3,200.65 crore.
In June 2021, the Finance Ministry approved an extra investment of INR 197,000 crore (US USD 26,578.3 million) for the pharmaceutical PLI plan in 13 important sectors such as active pharmaceutical ingredients, pharmacological intermediaries, and critical starting materials.
Source: https://pharmaceuticals.gov.in/