Pharma Mutual Funds: Worth The Investment Risk?

The COVID-19 pandemic has caused a surge in the value of pharma stocks, leaving many investors wondering if this is the start of a second major bull run. The pharmaceutical sector in India is one of the largest in the world, and the country has been dubbed the pharmacy of the world due to its low-cost generic drug production. The sector is highly regulated and has been supported by the government in recent years through tax incentives and investment in research and development.

Pharma mutual funds are sector-specific funds that invest primarily in the equity shares and related options of companies in the pharma and healthcare sectors. These funds offer investors an opportunity to capitalise on the growth of the pharma sector in India. However, investing in sector funds is considered a high-risk move, and financial experts generally advise against it for all but the most sophisticated investors.

So, should you invest in pharma mutual funds? Well, that depends on your risk tolerance and investment goals. If you have a good understanding of the sector and are an aggressive investor, then pharma mutual funds could be a suitable option for you. However, it is important to remember that these funds are less diversified than other types of funds, so they should only make up a small part of your portfolio.

The risks of investing in pharma mutual funds

Pharma mutual funds are considered a high-risk investment option. They are sector-specific funds that focus on the pharmaceutical and healthcare industries, which means that investors are exposed to a high level of industry-specific risk. If you are considering investing in pharma mutual funds, it is important to be aware of the potential risks involved.

Firstly, the performance of pharma funds is closely tied to the performance of the pharmaceutical sector. While the sector may experience strong growth during certain periods, such as during the COVID-19 pandemic, it is also subject to significant fluctuations. For example, the S&P BSE Healthcare Index experienced a sharp decline between 2015 and 2019, losing around a third of its value. This volatility can lead to high levels of risk for investors, as the value of their investments may fluctuate significantly.

Secondly, pharma mutual funds have a limited diversification of investments. These funds primarily invest in equity shares and equity-related options of companies within the pharma and healthcare sectors. While fund managers may attempt to diversify within the sector, the limited scope of investments can increase the risk of loss if the pharmaceutical sector underperforms. It is generally recommended that investors allocate only a small portion of their portfolio to these funds to manage their risk exposure.

Thirdly, the returns on pharma mutual funds may be unpredictable due to the dynamic nature of the pharmaceutical industry. The industry is heavily regulated and subject to various market conditions, such as changing government policies, product innovations, and competition. These factors can impact the performance of companies within the sector, leading to unexpected fluctuations in fund returns. Investors should carefully consider prevailing industry trends, the fund manager's track record, and the portfolio composition before investing.

Finally, investing in pharma mutual funds requires a thorough understanding of the sector. These funds are generally recommended for aggressive investors who have a basic knowledge of the pharmaceutical and healthcare industries. Investors should be aware of the risks associated with sector-specific funds and should only invest if they have a high-risk tolerance and a long-term investment horizon. It is important to note that most mutual fund advisors do not recommend sector schemes unless investors can handle high risk and are aware of the particular sector's dynamics.

In conclusion, while investing in pharma mutual funds may offer potential for high returns, it is important to carefully consider the risks involved. These funds are subject to industry-specific risks, limited diversification, unpredictable returns, and require a high level of sector knowledge. Investors should carefully assess their risk tolerance and consider diversifying their portfolios to manage their exposure to risk.

The outlook for the pharma sector

The pharmaceutical sector in India is one of the largest in the world and plays a significant role in the country's economy. The industry is known for its low-cost generic drug production and is considered the "pharmacy of the world". India has a large number of domestic pharmaceutical companies, as well as several multinational corporations operating in the country. The government of India has also taken initiatives to support the growth of the pharmaceutical sector, including tax incentives and investment in research and development.

The pharma sector is also in a strategic position globally, with Indian pharma fulfilling around half of the world's vaccine demand and over 80% of the global demand for retroviral drugs. The continuously rising pharma indices indicate the sector's revival amidst the COVID crisis, and mutual fund managers believe that the outlook for the sector is positive.

However, investing in sector funds is a highly risky business. The pharma sector is highly regulated, and investors need to be cautious and well-informed before investing. It is recommended that investors proceed in a staggered manner and do not invest more than 10% of their portfolio in such funds. Additionally, investors should identify their risk profile and take an informed decision accordingly.

The best-performing pharma mutual funds

TATA India Pharma & Healthcare Fund

This fund has delivered a CAGR/Annualized return of 13.9% since its launch in 2015. It returned 36.6% in 2023, -8% in 2022, and 19.1% in 2021. The fund's investment objective is to seek long-term capital appreciation by investing at least 80% of its net assets in equity/equity-related instruments of companies in the pharma and healthcare sectors in India.

Nippon India Pharma Fund

Nippon India Pharma Fund is a high-risk, equity-sectoral fund launched in 2004, delivering a CAGR/Annualized return of 21.6% since its launch. It returned 39.2% in 2023, -9.9% in 2022, and 23.9% in 2021. The fund's primary investment objective is to seek consistent returns by investing in equity and equity-related or fixed-income securities of pharma and other associated companies.

UTI Healthcare Fund

UTI Healthcare Fund is a high-risk, equity-sectoral fund launched in 1999, delivering a CAGR/Annualized return of 15.5% since its launch. It returned 38.2% in 2023, -12.3% in 2022, and 19.1% in 2021. The fund's investment objective is capital appreciation through investments in equities and equity-related instruments of the pharma and healthcare sectors.

SBI Healthcare Opportunities Fund

SBI Healthcare Opportunities Fund is one of the oldest pharma funds, launched in 1999. It has delivered a CAGR/Annualized return of 16.1% since its launch. The fund returned 38.2% in 2023, -6% in 2022, and 20.1% in 2021. The fund's objective is to provide investors with maximum growth opportunities through equity investments in stocks of growth-oriented sectors of the economy.

ICICI Prudential Pharma Healthcare and Diagnostics (P.H.D) Fund

This fund has delivered a 1-year return of 31.95% and a 5-year return of 300.00%.

Mirae Asset Healthcare Fund

Mirae Asset Healthcare Fund has delivered a 1-year return of 31.07% and a 5-year return of 286.89%.

Aditya Birla Sun Life Pharma & Healthcare Fund

This fund has delivered a 1-year return of 26.27% and a 5-year return of 220.95%.

HDFC Pharma and Healthcare Fund

HDFC Pharma and Healthcare Fund has delivered a 1-year return of 27.02%.

Other notable mentions

Other notable mentions include the Schwab Health Care Fund, the Fidelity Select Health Care Services Portfolio, and the Kotak Healthcare Fund.

While these funds have performed well, it is important to remember that sector funds are generally very risky, and investors should proceed with caution.

How to invest in pharma mutual funds

The pharmaceutical sector in India is one of the largest in the world and plays a significant role in the country's economy. The industry is known for its low-cost generic drug production and is considered the "pharmacy of the world". The sector is highly regulated and governed by the Drugs and Cosmetics Act, 1940, and the Drugs and Cosmetics Rules, 1945. India has a large number of domestic pharmaceutical companies, as well as several multinational corporations operating within the country.

Pharma mutual funds are sector-specific funds that invest in different pharmaceutical companies. They focus on creating long-term wealth for investors by taking advantage of growth in the pharmaceutical sector.

Research and Analyse:

Before making any commitments to invest in a pharma fund, thorough research is imperative. Examine the fund's historical performance, volatility, and expense ratio. Evaluate the fund manager's track record and the fund's strategy. Ensure the fund aligns with your financial goals and risk tolerance, focusing on the growth potential within the pharma industry.

Choose a Fund:

Select a fund that matches your financial objectives. Some of the top-performing pharma mutual funds in India include:

• Nippon India Pharma Fund
• TATA India Pharma & Healthcare Fund
• UTI Healthcare Fund
• SBI Healthcare Opportunities Fund
• ICICI Prudential Pharma Healthcare and Diagnostics (P.H.D) Fund
• Aditya Birla Sun Life Pharma & Healthcare Fund
• HDFC Pharma and Healthcare Fund
• Kotak Healthcare Fund
• Quant Healthcare Fund

Register and Invest:

Register online through a platform or app that offers the fund you have chosen. Complete the KYC process and set up your investment amount and frequency. Provide your PAN, bank details, and any other required information. Then, proceed with making your investment.

It is important to note that pharma sector mutual funds carry high risks due to their lack of diversification. These funds are suitable only for investors who have a strong belief in the growth potential of the healthcare industry and are willing to accept higher risks for the possibility of higher returns.

The Indian pharma sector's growth and global position

The Indian pharmaceutical sector has emerged as a global leader in research and innovation, driven by a combination of a robust scientific and technological base, growing government support, a strong domestic market, and cost-competitive manufacturing. The sector contributed nearly 1.32% of the Gross Value Added to the Indian Economy in 2020-21. The total annual turnover of Pharmaceuticals in the fiscal year 2021-22 was $42.34 billion.

The Indian pharmaceutical industry is currently ranked third in pharmaceutical production by volume and fourteenth by value. The industry is known for its low-cost generic drug production and is considered the "pharmacy of the world". India has a large number of domestic pharmaceutical companies, as well as several multinational corporations operating in the country. The country is home to more than 3,000 pharma companies with a strong network of over 10,500 manufacturing facilities as well as a highly skilled resource pool. The pharmaceutical sector in India is one of the largest in the world and plays a significant role in the country's economy. In recent years, the government of India has taken several initiatives to support the growth of the pharmaceutical sector, including tax incentives and investment in research and development.

The Indian pharmaceutical industry logged an average growth rate of 9.47% from FY18 to FY22, primarily driven by an increase in exports and a rise in the domestic market. It is expected that the pharma sector is likely to reach $65 billion by 2024 and $120 billion by 2030. The total market size of the Indian Pharma Industry is expected to reach $130 billion by 2030 and a $450 billion market by 2047. The domestic pharmaceutical industry is likely to reach $57 billion by FY25 and see an increase in operating margins of 100-150 basis points. The Indian pharmaceutical industry has seen massive expansion over the last few years and is projected to grow at a CAGR of over 10% to reach a size of $130 billion by 2030.

The major segments of the Indian Pharmaceutical Industry include generic drugs, over-the-counter medications, bulk drugs, vaccines, contract research & manufacturing, biosimilars, and biologics. India is the largest provider of generic medicines globally, occupying a 20% share in global supply by volume, and is also the leading vaccine manufacturer globally with a market share of 60%, contributing 40 to 70% of the WHO demand for Diphtheria, Tetanus and Pertussis (DPT) and Bacillus Calmette–Guérin (BCG) vaccines and 90% of the WHO demand for the measles vaccine. India is one of the biggest suppliers of low-cost vaccines in the world and accounts for 60% of global vaccine production, making it the largest vaccine producer in the world. India also has the highest number of US-FDA compliant Pharma plants outside of the USA.

The Indian pharmaceutical sector supplies over 50% of global demand for various vaccines, 40% of generic demand in the US and 25% of all medicine in the UK. The domestic pharmaceutical industry includes a network of 3,000 drug companies and about 10,500 manufacturing units. India enjoys an important position in the global pharmaceuticals sector and has a large pool of scientists and engineers with the potential to steer the industry ahead to greater heights. Presently, over 80% of the antiretroviral drugs used globally to combat AIDS (Acquired Immune Deficiency Syndrome) are supplied by Indian pharmaceutical firms.

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