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Tata Capital > Blog > Wealth Services > Pharma Mutual Funds: Meaning, Advantages & How to Invest

Wealth Services

Pharma Mutual Funds: Meaning, Advantages & How to Invest

Pharma Mutual Funds: Meaning, Advantages & How to Invest

Summary: Pharmaceutical mutual funds are equity funds that specialise in the healthcare sector and mainly invest in firms that deal in pharmaceuticals and other healthcare issues. Even though such funds have growth opportunities due to increased health care demands and professional management, they come with risks associated with concentration and regulation. They are most appropriate for being used in satellite portfolios of individuals with a high-risk profile.

The pharmaceutical and healthcare industry is one of the central pillars of the world economy due to the growing healthcare demands, the process of medical innovations, and a constant demand for medicines irrespective of market cycles. If you want to capitalise on the potential of this resilient industry without choosing stocks personally, you may want to look at pharma mutual funds. This article will tell you everything you need to know about these mutual funds, what they are, their advantages, who should invest in them, potential risks, and how to start investing.

What Are Pharma Mutual Funds?

A Pharma fund is a specialised stock fund that mainly invests in firms that work in the pharmaceutical and healthcare industry, such as drug manufacturers, biotech companies, specialist hospitals, and medical device manufacturers. According to SEBI rules and regulations, it is mandatory for a sectoral fund to allocate at least 80% of its entire investment in equity or equity-related instruments of the respective sector. Through the consolidation of capital within this particular sector, you will be able to invest directly in the growth potential of medicine and medical services.

Read More – Wealth creation strategies for the 50+

How Do Pharma Sector Mutual Funds Work?

The pharma industry mutual funds will invest money from many investors to create a well-diversified portfolio consisting of stocks in the pharma industry and healthcare. This pool of assets is managed by a seasoned fund manager who has sector knowledge and research abilities. Since the funds are dedicated solely to one particular sector, their performance will depend on how the pharmaceutical sector as a whole performs, since they do not have any cross-sectoral diversification.

Also Read – Types of mutual funds in India

Benefits of Investing in Pharma Mutual Funds

It is wise to invest in the pharma mutual funds or the pharma and healthcare fund because they will help you make more money by investing in the healthcare industry. The following are the advantages of the funds:

  • Access to Leading Companies: Get exposure to some of the best pharmaceutical and healthcare companies that would require special industry knowledge and money to choose individually.
  • Defensive Demand Characteristics: Leverage the inelasticity of healthcare, where the demand for medicines and critical health services remains constant despite changes in economic conditions or market cycles.
  • Powerful Structural Growth Drivers: Take advantage of the industry trends such as an ageing population, growing diseases, innovations in medicine, and increased demand for new medicines and vaccines.
  • Expert Professional Management: Work with seasoned fund managers and research specialists who carry out thorough analysis and stock selection within their respective sectors.
  • Long-Term Wealth Creation Potential: Structure your portfolio to benefit from the strong growth that results from advances in medical technology, research, and healthcare facilities over long-term investment periods.
  • Affordable and Flexible Entry: Invest in the right way through Systematic Investment Plans, where you can start investing with a minimum amount from ₹100 to ₹1,000.

Note: Specific sector funds, such as pharma mutual funds and funds for pharma and healthcare, are high-risk investments as they have a focused approach on a particular sector and are therefore ideal for investors having a higher appetite for risk.

Read More – ELSS Mutual Funds

Who Should Invest in Pharma and Healthcare Funds?

Before deciding on a pharma and healthcare fund, you need to assess whether your risk-taking abilities and financial goals match investments in this area. Pharmaceutical and healthcare funds are normally appropriate for:

  • Risk-takers who can manage high-risk investments and are able to handle short-term volatility in a particular industry.
  • Investors have a long-term investment horizon of five years or more to handle cyclic volatility within the healthcare industry.
  • Investors who believe in the sustainable growth of healthcare on both the domestic and international levels.
  • Investors who have a diversified core stock portfolio and seek to add sector-focused satellite investments on top of it, as opposed to having an entire sector fund as the only investment holding.

Risks and Things to Consider Before Investing

Before choosing to invest in pharma sector mutual funds, it is necessary to consider the possible benefits alongside several specific risk factors:

  • Concentration Risk: Since the fund specialises only in one particular industry, any negative regulation or any unfavourable development in the pharmaceutical industry will not be offset by the profits made elsewhere.
  • Regulatory and Pricing Pressures: Health agency demands for strict compliance, drug approval delays, and government price controls can directly affect your profit margins.
  • Higher Volatility: Sector-specific investment funds generally have more volatile price changes as compared to the prices of more diverse equity investment funds.
  • Due Diligence: You need to carefully consider the expense ratio, underlying portfolio makeup, and performance record of the scheme before selecting any one fund. Experts have advised that such allocation be kept as a secondary or satellite part of your total investment portfolio strategy.

Recommendation: According to financial experts, you should maintain the pharma mutual funds as only a small part of your investment portfolio strategy and not as the main investment strategy.

Also Read – What Is Debt Fund Investment?

How to Invest in Pharma Mutual Funds

Pharma fund investment planning should have a clear process of doing things to ensure that your investments are in line with your plan. Below is how you can go about it:

  • Step 1: Complete Your KYC Formalities: Make sure that your KYC verification is complete with your PAN and address proof if you haven’t yet completed it.
  • Step 2: Choose Your Investment Platform: Choose the channel that suits you to make the investment either directly with the Asset Management Company (AMC) or with the help of any mutual fund app/broker/distributor.
  • Step 3: Compare Fund Options: Analyse different mutual funds and funds for pharmaceutical stocks by looking at their expense ratios, performance of fund managers, and portfolio contents.
  • Step 4: Select Your Mode of Investment: Select the Systematic Investment Plan (SIP) route in case of disciplined and rupee-cost-averaged investment, or go for a lump sum if you have a substantial corpus to invest.
  • Step 5: Determine Allocation Size: Choose the correct allocation size of the pharma mutual funds considering the total size of your portfolio, ensuring that its allocation size remains modest.
  • Step 6: Track and Review: Your mutual fund needs to be monitored regularly for performance compared to its benchmark to remain consistent with your wealth creation plan.

Conclusion

Pharma mutual funds, along with any other speciality pharma fund, offer concentrated investment in an industry that is defensive and innovation-oriented. They are most ideal for people who have high risk tolerance levels and are willing to make a long-term commitment by investing in them as satellites to their diversified core portfolio. If you are considering structuring your financial plan or wealth management advisory services, you may consider the wealth advisory services provided by Tata Capital Wealth.

Disclaimer: Mutual funds are prone to market risks. Please read the documents associated with the schemes carefully before investing in mutual funds. Names of funds, expense ratios, and performance numbers keep changing. Please check the latest information from the official AMC website or amfiindia.com before taking any financial decisions.

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FAQs

What is a pharma mutual fund?

A pharma mutual fund is a type of sector-specific mutual fund where the fund manager allocates at least 80% of the total investment in equity and equity-related securities of companies engaged in the pharmaceutical and healthcare industries.

What are the advantages of investing in pharma funds?

Pharma funds have advantages such as professional management by experts in the particular sector, the defensive nature of demand for healthcare services irrespective of the economic environment, structural growth factors such as an ageing population and affordable entry via SIPs.

Who should invest in pharma sector mutual funds?

Mutual Funds from the pharma sector are best suited for those investors having a higher level of risk-taking ability and an investment period of more than five years. Also, these kinds of investors have an existing core diversified portfolio.

Are pharma and healthcare funds risky?

Yes, because they are exposed to concentration risk since they are invested only in one sector without any cross-industry diversification. They may also be influenced by policy changes, drug price controls, and increased volatility.

How do I start investing in a pharma fund?

You could begin by doing your KYC verification, opting for your desired investment avenue, comparing investment plans using cost ratios and assets held, and deciding between a regular SIP and lump-sum investments.

What is the minimum SIP amount for pharma mutual funds?

The minimum SIP investment range will usually start from ₹100 to ₹1,000 based on your choice of a particular asset management company and their scheme guidelines.

Is a pharma fund better than a diversified equity fund?

This is not always the case because of their different uses. Though diversification equity funds invest in various sectors, pharma funds are only dedicated to a single sector and are therefore used as satellite investments, but not as core ones.
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