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Pharma Funds – Should You Invest & Five BEST Pharma Funds

Highlights

  • Pharma funds are going through a glorious run of late - But shall you invest in them?
  • Do so if you have a high-risk appetite else you can trust multi-cap funds that invest a little in the pharma sector

Pharma funds are those funds that invest in companies engaged in the pharmaceutical sector. These are one of the types of sector funds which invest only in one sector, other such sector funds are banking, technology, consumption etc. Pharma funds have been the chartbusters in the last one year and have delivered the best returns. Last four months specifically have been the time when these funds have outperformed significantly. Portfolios of these funds comprise the leading pharmaceutical companies in India such as Sun Pharma, Lupin, Cipla, Dr Reddy’s, Abbott etc. To understand how pharma funds deliver returns, let us first understand how the pharma sector operates.

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How Does the Pharma Sector Work?

Pharma sector is considered as a secular growth story since demand for medicines will always remain robust. Most of the Indian pharma companies derive their revenues from production of generics (common low cost medicines), which are exported to western countries. Thus, being an export oriented sector, it is prone to policy and regulatory changes in the country where exports are done. This is also a sector which requires huge R&D and innovation is key. For a company to grow consistently, it needs to keep introducing newer medicines which can treat diseases more effectively. Indian pharma companies have been under stress for the last 4-5 years owing to regulatory hurdles, especially from FDA (Food and Drug Administration). FDA is the pharma regulatory body in the United States, which is the largest importing country for Indian pharma companies. These companies have also lacked innovation over the last few years. Nevertheless, Indian pharma companies remain among the best and most competitive globally.

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Why are Pharma Funds Doing Well?

Performance of pharma funds is dependent on the growth in revenues and profits of pharma companies. As mentioned earlier, most of the pharma companies have been struggling for growth in the last 5 years, which has led to poor performance of pharma funds Most of the investors stayed away from pharma funds or pharma stocks and preferred to invest in financials and consumption. However, this scenario has somewhat changed in the last year or so. These have been the three major reasons for this change and good performance:

Valuations (PE & PB-Price to earnings & Price to Book) of pharma stocks became attractive since fall in stock prices led to under-ownership and low valuations led to flows being redirected again to pharma.

COVID-19 brought pharma back into the limelight. There is a growing view that most countries would now spend more on healthcare which will benefit the pharma sector. Thus, pharma stocks have rallied and pharma funds have delivered high returns.

The most prominent sector in India-financial services, which has the highest weight in Nifty (around 30%), has been plagued with various issues and is expected to underperform. This has led to a sector rotation by investors with money flowing out of financials to pharma.

Let us now look at the best performing pharma funds.

Five BEST Performing Pharma Funds

DSP Healthcare Fund

This fund is offered by DSP Mutual Fund and invests in leading pharmaceutical and healthcare companies. Let us look at the key features and points to note about this fund:

  • This fund was launched on 30th Nov 2018 and has delivered 22.79% annualized returns since launch.
  • The benchmark is S&P BSE Healthcare Index.
  • The fund has an AUM of INR 412 crores and consists of 22 stocks
  • The top five stocks in the portfolio are Dr reddy’s, J.B. Chemicals and pharma, IPCA Labs, Divi’s Labs and Torrent Pharmaceuticals.
  • The portfolio has 39% in large-cap pharma stocks and 61% in mid & small-caps.
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ICICI Prudential P.H.D(Pharma, Healthcare & Diagnostics) Fund

This fund is offered by ICICI Prudential AMC, and as the name suggests, it invests in different companies associated with healthcare, pharma and diagnostics. Let us look at the key features and points to note about this fund:

  • This fund was launched on 13th July 2018 and has delivered 15.79% annualized returns since launch.
  • The benchmark is S&P BSE Healthcare Index.
  • The fund has an AUM of INR 1,460 crores and comprises of 33 stocks
  • The top five stocks in the portfolio are Cipla, Sun Pharma, Lupin, Biocon and J.B. Chemicals.
  • This portfolio has 57% in large-cap pharma stocks and 43% in mid & small-caps.

Mirae Asset Healthcare Fund

This fund is offered by Mirae AMC, let us look at the key features and points to note about this fund:

  • This fund was launched on 2nd July 2018 and has delivered 19.57% annualized returns since launch.
  • The benchmark is S&P BSE Healthcare Index.
  • The fund has an AUM of INR 581 crores and comprises of 28 stocks
  • The top five stocks in the portfolio are Sun Pharma, Dr Reddy’s, Divi’s Labs, Aurobindo Pharma and Biocon.
  • This portfolio has 62% in large-cap pharma stocks and 38% in mid & small-caps.

Nippon India Pharma Fund

This fund is offered by Nippon AMC, let us look at the key features and points to note about this fund:

  • This fund was launched on 5th June 2004 and has delivered 20.21% annualized returns since launch.
  • The benchmark is S&P BSE Healthcare Index.
  • The fund has an AUM of INR 2,992 crores and comprises of 18 stocks
  • The top five stocks in the portfolio are Aurobindo Pharma, Cipla, Sun Pharma, Dr Reddy’s and Divi’s Labs,
  • This portfolio has 73% in large-cap pharma stocks and 27% in mid & small-caps.

SBI Healthcare Opportunities Fund

This fund is offered by SBI AMC, let us look at the key features and points to note about this fund:

  • This fund was launched on 5th July 1999 and has delivered 15.13% annualized returns since launch.
  • The benchmark is S&P BSE Healthcare Index.
  • The fund has an AUM of 1139 crores and comprises of 27 stocks
  • The top five stocks in the portfolio are Cipla, Sun Pharma, Aurobindo Pharma, Lupin and Divi’s Labs,
  • This portfolio has 59% in large-cap pharma stocks and 41% in mid & small-caps.
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Returns of BEST Pharma Funds

Let us look at the returns these pharma funds (regular plans) have delivered (in % terms):

Fund NameLast 6 monthsLast 1 yearLast 3 years
DSP Healthcare29.0542.57N.A.*
ICICI P.H.D28.6340.92N.A.*
MIRAE Healthcare31.4043.86N.A.*
NIPPON Pharma27.0037.8014.67
SBI Healthcare25.9838.426.18

*These returns are as on 22nd June, 2020

*N.A.- These funds have not completed 3 years, so returns for the said period are not mentioned.

Should You Invest in Pharma Funds?

As evident from the returns of the last 6 months-1 year, it has been a fantastic period for pharma funds. These have been the best performing funds across all equity mutual funds. However, you need to be mindful of the fact that investing in sector funds is risky. To know more about sector funds, you can read another post of ours – https://www.wishfin.com/mutual-fund/sector-funds-are-these-a-good-investment/

These same pharma funds were laggards for the last five years, so investors who invested around 2013-14 had made low single digit returns till 2019. Only those who have a high risk appetite should invest in sector funds like pharma. They are a good bet going forward and we would recommend having a small allocation of 5-10% in these funds. If you do not want to take higher risk, it is advisable to stick to multi-cap funds, which anyways have a reasonable allocation to the pharma sector in the portfolio. To know about the best performing multi-cap funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/five-best-performing-multi-cap-funds-to-invest-in/