Pharma Mutual Funds

What are Pharma Mutual Funds:

These are also called as healthcare-themed mutual funds that invest specifically in the companies belonging to or closely related to the healthcare sector. The fund aims to provide high returns on the capital invested through varying business cycles. Despite being risky at times, pharma funds tend to generate decent returns in the long run as it is one industry which undergoes constant long term growth due to modern technology, latest research and continuously increasing population.

Regardless of the type of market segments such as debt or, equity that a fund investments sectoral and thematic funds focus on a specific sector or theme, etc. There are mutual funds which are sector specific. These funds specifically target specific economic sectors or themes and focus on income generation and capital appreciation by investing mainly their chosen theme/sector. A sector of importance in India from an investor’s point of view is the Pharmaceutical sector, which is part of the healthcare theme. At present there are a few popular Pharma mutual funds or Pharma funds in India that allow investors to make sector-specific investments.

Sectoral Mutual Funds:

 The portfolio of sector mutual funds consists mainly of investment into one key sector thus these schemes offer less amount of diversification and are considered to be less favourable for conservative investors. In case of pharma mutual funds or healthcare themed mutual funds, the target investment areas would include pharmaceutical companies, healthcare providers, diagnostic companies and so on.  Due to targeted exposure in a single sector, the sector-specific exposure risk is high in case of these mutual funds. Their performance is aligned with the performance of the sector in which they are investing. This type of funds is normally considered suitable for aggressive investors with relatively high risk tolerance.

Sector funds allow investors to take targeted bets on the appreciation potential of a particular industry. Certain sectors in an economy may offer high growth potential due to economically driven investing catalysts. However, sector funds can be part of a broader portfolio-level strategy with higher exposure to certain key sectors offering potentially higher investment returns in the long term.

A sector fund has portfolio constraints which require the portfolio manager to choose investment securities for the fund that are aligned with the fund’s specific objective. However, in general, sector funds have characteristic risks that affect the overall portfolio due to their targeted sector-specific exposure.

Certain sectors are also associated with market cycles. Consumer cyclical stocks include companies involved in automotive, housing, entertainment, FMCG and retail activities. These companies and market sub-sectors do well when an economy is growing. Consumer staples stocks including companies involved in home utilities, food, beverage and daily use household items production are known to be more stable through all types of market cycles.

Types of Sector Funds:

As an investor, one can invest in a variety of sectors or themes as per their area of interest. The following are some of the key sectors and themes across which Indian investors can make their mutual fund investments:

• Healthcare/Pharmaceuticals/Pharma Mutual Funds: These funds can cover any kind of for-profit medical institution such as pharmaceutical companies or large healthcare organisations. Many such funds also invest in diagnostic companies,biotechnology companies and also companies that make pioneering advances in the pharmaceutical or healthcare
• Technology: These funds seek to provide investors with greater exposure intothe technology sector. The sector focuses primarily on companies involved in the manufacture of computers, electronics and other information technology areas that are used in a wide range of applications. 

• Financial: These funds invest in the financial sector. Holdings of these funds include equities of investment, insurance, banking,non-banking financial companies and even accounting firms. This sector tends to be volatile in the short term but has historically yielded high returns in the long term. 

• Natural Resources: These funds invest in oil and gas as well as other natural energy sources. These funds also invest incompanies involved in mining, timber and forestry. These are usually appropriate for investors seeking long-term capital appreciation of their investment. 

• Real Estate/Infrastructure: These fundsusually provide a way for smaller investors to participate in gains from real estate and infrastructure without actually buying a real property. These often provide both growth and income over the long term investment horizon especially in growing economies such as India.

Pros and Cons of Investing in Sector Funds:

Here are a few pros and cons of sector-based funds which an investor should consider before making a final decision regarding investment in pharma funds.

• Pros:

Investing in pharma funds gives the investor an opportunity to take advantage of the emerging trends in the larger healthcare sector. However, the timing of the investment plays an important role as sudden rise or fall in trends can drastically affect your financial objectives at least in the short term. When the timing is correct, the returns offered by these potential high volatility mutual funds tend to be substantially high.

• Cons:

The disadvantage of investing in a specific sector is the possibility that one might make a wrong choice. If one might think that the oil and gas exploration sector is going to be profitable and there will be an increase in its prices in the upcoming year. This may lead an investor to buy a sector fund of oil and gas companies from that part of the market. However, if one has predicted wrongly and the sector witnesses a slow down, the losses can be substantial.

In addition, sector funds are too focussed and they cannot move away from their chosen sector even if its investments are not doing well. And of course, these are more vulnerable to the global as well as domestic economic cycle.

Why Invest in Sector Funds?

There are certain sectors and companies that steadily grow over time. They may face wide fluctuations but they eventually tend to outperform their peers in the long term. In such a scenario, if one is comfortable with wide fluctuations in value and has a long-term perspective, specific sector funds such as technology and pharma mutual funds could be a smart investment choice from a returns perspective. However, sector specific schemes such as pharma funds feature potentially high levels of volatility and one has to be quite careful when choosing these investments.

The smartest use of sector funds can be made by veteran investors as a portfolio diversification option. In this case, a portfolio of mutual funds that includes an S&P 500 Index fund, a bond fund, and a foreign stock fund, could be further diversified by adding small allocations of  sectoral or thematic funds.

However, investing in sector funds for speculative purposes is not recommended by experts. Speculative investing entails placing bets on stocks or funds that are predicted to soar in value at a future date. This is a risky proposition as speculators generally try to make huge profits in a very short period through speculative activities.

Difference Between Sector Funds and Thematic Funds:

Sector funds invest in equities of just one sector or in companies very closely associated with their chosen sector. These funds are highly focused in terms of their investment style. Therefore the fate of a sector fund is tied to the sector that it tracks.

Differently, a thematic fund is a bit more broad-based. It identifies a theme such as consumption, healthcare, etc. and then invests in sectors and companies that are united by this chosen theme. An infrastructure fund is a good example of these funds as these invest in the shares of companies in sectors such as housing, cement, construction and road building which are all united by the chosen theme.