Pharma sector mutual funds: Meaning, advantages and how to invest

Investing in mutual funds can be a suitable way to potentially grow wealth over time and meet financial goals.

Among the various mutual fund categories available in India, sectoral and thematic funds offer investors an opportunity to tap into industries with significant growth potential. One such option is pharma sector mutual funds, which often appeal to investors owing to the ever-present and growing demand for healthcare and pharmaceuticals.

To invest in the pharmaceuticals industry through a mutual fund, you can either choose a sectoral fund focusing primarily on pharma, or a healthcare-themed fund that invests in pharmaceuticals as well as other related industries.

One such investment option is the Bajaj Finserv Healthcare Fund, a thematic fund investing in investing in pharma, healthcare and allied companies.

In this article, we will offer a detailed view of pharma sector mutual funds: their meaning, advantages, who should invest, how to invest, and important considerations.

• Table of contents

• What are pharma sector mutual funds?
• Benefits of investing in pharma sector funds
• Who should invest in pharma sector mutual funds?
• How to invest in pharma sector mutual funds?
• Things to know before you invest in a pharma sector mutual fund

What are pharma sector mutual funds?

Pharmaceutical mutual funds are mutual funds that invest primarily in companies operating in the pharmaceutical industry. These funds can include investments in businesses involved in drug manufacturing, biotechnology and medical equipment production.

Pharma and healthcare sectors are a cornerstone of the global economy, driven by increasing population, rising life expectancy, and growing health awareness. Investing in this sector through pharma sector mutual funds enables investors to potentially benefit from its long-term growth trajectory.

Pharma funds can offer a high return potential, particularly during periods of healthcare innovation or increased demand for medical services. For instance, the Covid 19 pandemic stressed the importance of a robust healthcare infrastructure and has driven increased investments in this space in India, which is witnessing a healthcare boom.

However, such funds are also associated with sector-specific risks and can therefore be more volatile than broad market equity funds.

Benefits of investing in pharma sector funds

Growth potential

The healthcare and pharma sector has the potential to deliver relatively stable growth due to constant innovation and a constant demand for medical services. With advancements in biotechnology and increasing healthcare spending worldwide, these funds can yield substantial return potential over the long term.

Defensive investment

Adding pharma or health sector mutual funds to your portfolio provides exposure to several defensive investment opportunities – i.e., avenues that witness some demand even during economic downturns. This diversification can help mitigate risks from other, more cyclical sectors such as real estate, IT, automobiles, finance, defence, etc.

Long-term return potential

The pharmaceutical sector has the potential to offer significant long-term return potential, especially during periods of technological breakthroughs or increased healthcare funding.

Global exposure

Many healthcare pharma sector funds invest in global pharmaceutical companies, offering exposure to international markets and innovations.

Who should invest in pharma sector mutual funds?

Pharma-related mutual funds can be suitable for the following types of investors:

• Investors with high-risk tolerance: Sector-specific funds can be volatile, so they are best suited for investors willing to take calculated risks.
• Long-term investors: Those who aim to stay invested for at least 5 years to benefit from the long-term growth potential of the healthcare industry.
• Experienced investors: Individuals who understand market trends and can anticipate the performance of the pharmaceutical sector.
• Diversification seekers: A tactical allocation to pharma mutual funds can add diversification to a well-rounded portfolio.

How to invest in pharma sector mutual funds?

After assessing if the pharma sector is a suitable investment opportunity, you can follow these steps to invest in a specific mutual fund:

1. Research the fund: Compare the performance of various pharma sector mutual funds. Analyse key parameters like expense ratio, fund manager expertise, and holdings.
2. Choose your investment platform: Invest directly through Asset Management Companies (AMC) or use platforms like mutual fund apps or brokers.
3. Complete KYC formalities: Ensure you have completed the Know Your Customer (KYC) requirements before investing.
4. Select the right investment mode: Choose SIP (Systematic Investment Plan) to invest in regular instalments or make a one-time lumpsum investment if you have sufficient funds. Remember that SIPs offer the advantages of affordability and rupee cost averaging.
5. Monitor your investment: Regularly review your fund’s performance and make adjustments if required.

Things to know before you invest in a pharma sector mutual fund

Here are some of the factors to consider before investing in a mutual fund investing in pharmaceuticals or related sectors:

Sectoral risks: Sector/thematic funds are more volatile than diversified equity funds since they depend solely on the performance of a single sector.

Market timing matters: Investing during periods of sectoral growth or when the healthcare industry is on an upward trend may potentially yield better results.

Expense ratios: Compare the expense ratio of various funds, as higher fees can eat into your returns over time.

Macroeconomic factors: Global healthcare trends, government policies, and innovation in medical technology can significantly impact the performance of healthcare sector mutual funds.

Professional advice: If you're uncertain about the sector, consult a financial advisor to assess whether it aligns with your investment goals.

Conclusion

Pharma sector mutual funds offer a suitable investment opportunity for high-risk investors looking to capitalise on the growth potential of the pharmaceutical and healthcare industries. However, these funds come with inherent risks due to their sectoral focus. Hence, you should always evaluate your objectives and risk appetite before investing in these funds or consult an investment expert for customised advice.

FAQs:

Are pharma sector mutual funds stable investments?

Pharma sector mutual funds are not considered stable as they are equity funds and are hence prone to market volatility. Additionally, they are concentrated in a single sector, making them prone to additional risks if the sector underperforms the broader market. However, they may at times provide relative stable return potential due to the defensive nature of the healthcare sector.

How do I know if a pharma sector mutual fund investment is suitable for my portfolio?

Evaluate your investment goals, risk tolerance, and existing portfolio diversification. If you're willing to stomach high volatility in the short-term and believe in the long-term potential of the healthcare industry, these funds can be suitable. However, it is always wise to consult a financial expert for tailored advice before making any investments.

Are pharma sector mutual funds profitable investments?

There are no guarantees of profits in the investment world. While pharma sector mutual funds offer the potential for significant long-term growth, they can experience high volatility, especially in the short term. Additionally, the sector may underperform the broader market in some market cycles. Eventual returns depend on market conditions and fund selection.

Who should consider investing in pharma sector mutual funds?

Investors with a high-risk appetite, a long investment horizon, and an interest in the growth prospects of the pharmaceutical sector can consider these funds.

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.