Nifty Pharma ETF: A comprehensive guide for investors

Sector-specific mutual funds give investors the opportunity to tap into the growth potential of a particular sector without having to cherry-pick individual stocks of companies. If you want to invest in the pharmaceutical industry, you can invest in a mutual fund or ETFs targeting pharma sectors. It will give you exposure to companies involved in the research, development, manufacturing, testing, and distribution of pharmaceutical drugs, vaccines, therapeutic treatments and related healthcare products. Nifty Pharma ETFs have been quite popular in this category for quite a while now. Let’s understand them in detail.

• Table of contents

• What is a nifty pharma ETF?
• How does nifty pharma ETF work?
• What are the benefits and risks of investing in nifty pharma ETF?
• How to invest in nifty pharma ETF?
• Nifty pharma ETF taxation

What is a nifty pharma ETF?

A Nifty Pharmaceutical Exchange-Traded Fund is a passive investment vehicle that tracks the Nifty Pharma Index, which consists of the top pharmaceutical companies listed on the National Stock Exchange (NSE) of India.
A Nifty Pharma ETF allows investors to gain exposure to the Indian pharmaceutical sector without having to pick individual stocks of pharmaceutical companies.

How does nifty pharma ETF work?

A Nifty Pharma ETF is designed to mirror the performance of the Nifty Pharma Index by holding a portfolio of stocks in the same proportion as the index. It passively tracks the index and, therefore, comes with a lower expense ratio. The price of the ETF changes throughout the trading day based on supply, demand, and changes in the underlying stock prices.

What are the benefits and risks of investing in nifty pharma ETF?

Now that you know the Nifty Pharma ETF meaning and how it works, you need to know the benefits you can reap when you invest in Nifty Pharma ETFs. They are:

• Diversification: Investing in a Nifty Pharma ETF provides investors exposure to multiple pharma stocks while mitigating the risk associated with individual stock selection.
• Growth potential: With increasing demand in the healthcare sector, the Indian pharma sector has long-term growth potential which makes Nifty Pharma ETFs suitable for most investors.
• Liquidity: Nifty Pharma ETFs, like all other ETFs, can be traded on stock exchanges. This offers a higher level of flexibility and liquidity when compared with mutual funds. They also have lower expense ratios than most other types of active mutual funds.
• Transparency: Nifty Pharma ETFs disclose their holdings regularly. This allows investors to track where their money is invested and encourages more people to invest in Nifty Pharma ETFs.

Knowing “what is a Nifty Pharma ETF” and the benefits of investing in them is not enough. You must be aware of the risks that are associated with investing in Nifty Pharma ETFs. They are:

• Regulatory risks: The pharmaceutical industry is highly regulated, and policy changes can impact stock performance. For example, if a company’s drug does not meet the main endpoint in its clinical trial or a drug is rejected by a regulatory agency, it can affect the stock price of the company and the Pharma ETF that holds its stock.
• Market volatility and global events: Many pharma companies earn revenue from exports, making them vulnerable to currency fluctuations. Economic downturns, global trade policies, and pandemics can affect pharma stock prices which, in turn, affect Nifty Pharma ETFs.
• Sector-specific risk: Since Nifty Pharma ETFs focus only on pharma stocks, they lack diversification across other sectors.

How to invest in nifty pharma ETF?

• Open a demat and trading account with a registered broker.
• Select a Nifty Pharma ETF based on the expense ratio, liquidity, and past performance of the ETF.
• Search for the ETF’s ticker symbol on the NSE/BSE and place an order.
• Regularly track the ETF’s performance compared to the Nifty Pharma Index. Make hold or trade decisions accordingly.

Nifty pharma ETF taxation

The capital gains from Nifty Pharma ETFs are taxed like other ETFs based on the holding period and type of ETF. The dividends earned are taxed in the hands of the investor at the applicable tax rate.

• Short-term capital gains (STCG): If you sell your Nifty Pharma ETF units within 12 months of purchase, the gains from it are taxed at 20% under the STCG tax category.
• Long-term capital gains (LTCG): If you sell your Nifty Pharma ETF units after 12 months of purchase, the gains exceeding Rs. 1.25 lakh are taxed at 12.5% under the LTCG tax category.

Conclusion

In conclusion, the Nifty Pharma ETF is an excellent choice for investors looking to gain exposure to India's growingpharmaceutical sector in a cost-effective and diversified manner. However, like all mutual fund investments, it comes with a risk factor. Investors should consider their financial goals, risk tolerance, and market conditions before investing in the best Nifty Pharma ETFs.

FAQs:

How does a Nifty Pharma ETF track the Nifty Pharma Index?

The ETF passively replicates the Nifty Pharma Index by holding its constituent stocks in the same proportion. This ensures the performance correlation of the ETF with the index.

What are the benefits of investing in a Nifty Pharma ETF?

Some of the benefits include diversification, low cost, liquidity, sector growth, transparency, passive management, risk reduction, ease of trading, long-term potential, and tax efficiency.

What are the risks associated with investing in a Nifty Pharma ETF?

Some of the risks associated with making a Nifty Pharma ETF investment include sector concentration, regulatory changes, market volatility, foreign exchange risk, economic downturns and patent expirations.

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 an 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.