Invest in Top Pharma Mutual Funds In 2022: High Return Mutual Funds In India
In India, the healthcare sector has a long way to go before it reaches the levels of most Asian peers and developed countries. In India, the number of hospital beds, doctors, nurses, primary healthcare facilities for every 1 lakh people is way less than many other countries. So, this is an opportunity for companies in the healthcare and pharma sector to increase the penetration of basic healthcare infrastructure so that the basic medical services reach the entire Indian population. This article focuses on how to invest in top pharma mutual funds in 2021.
What are pharma mutual funds?
Healthcare mutual funds or pharma mutual funds are sectoral mutual funds that invest in shares of healthcare or pharma companies. As per SEBI guidelines, a sectoral fund is an open-ended equity scheme that has to invest a minimum of 80% of its total assets in equity and equity-related instruments companies belonging to a specific sector (healthcare or pharma sector in this case).
The healthcare sector consists of hospitals, diagnostics, pharmaceuticals, etc. Some of the listed companies in this sector include:
- Hospital companies like Apollo Hospitals, Fortis Health, Narayana Hrudayala, etc.
- Diagnostics companies like Dr. Lal Pathlabs, Thyrocare, Metropolis, etc.
- Pharmaceutical companies like Sun Pharma, Dr. Reddys, Lupin, Cipla, etc.
- Companies that manufacture pharma ingredients like Granules India, Divis Laboratories, etc.
Pharma and healthcare mutual funds invest in shares of the above companies and other listed companies in this space.
Returns of best pharma mutual funds
Let us look at the returns given by some of the healthcare and pharma mutual funds.
|Scheme name||AUM (Rs. crores)||1-year (Absolute Returns)||3-years(CAGR returns)||5-years (CAGR returns)|
|Nippon India Pharma Fund||4,909||15.24%||24.45%||16.53%|
|Tata India Pharma & Healthcare Fund||545||14.63%||26.26%||14.54%|
|Aditya Birla Sun Life Pharma & Healthcare Fund||517||13.15%||NA||NA|
|ICICI Prudential Healthcare and Diagnostics (P.H.D) Fund||2,766||11.95%||26.30%||NA|
Note: The returns are for direct plans with growth option as on 24th Feb 2022. The 3Y and 5Y returns are not available for funds which have not completed the tenure.
Who should invest in healthcare and pharma mutual funds?
Investors willing to allocate a small part of their investment portfolio to sectoral funds such as the healthcare and pharma sector may consider investing in pharma mutual funds. But, please note that investing in a pharma mutual fund will lead to sectoral concentration in your investment portfolio, which is the opposite of diversification, which most investment advisors recommend. So, if you are an aggressive investor with a high-risk appetite, you may invest some amount in a pharma mutual fund scheme.
Taxation of pharma mutual funds
For taxation purposes, pharma mutual fund schemes are treated as equity schemes and taxed accordingly.
Short-term capital gains (STCG) tax:
- If you sell your pharma mutual fund scheme units within twelve months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) tax will be levied at 15%.
Long-term capital gains (LTCG) tax:
- If you sell your pharma mutual fund scheme units after twelve months of purchase, the capital gain will be classified as long-term capital gain (LTCG). Every financial year, the first Rs. 1 lakh long-term capital gain will be exempt from taxation. The incremental long-term capital gain above Rs. 1 lakh will be taxed at 10%.
Risks involved in pharma mutual fund schemes
Pharma mutual fund investors are exposed to equity risk and sector concentration risk within equity. All equity mutual funds, including pharma mutual funds, are subject to market risks. Whenever there is an adverse event like recession, war, pandemic, political instability, inflation, etc., the entire market undergoes a correction. During such events, healthcare and pharma shares also sell-off along with the broader equity market. It leads to a fall in the NAVs of healthcare and pharma mutual funds.
Pharma as a standalone sector is also vulnerable to a sell-off. For example, during the 2017-20 period, shares of pharma companies saw a fall. Many of these companies market their products in the US market, which was seeing pricing pressure during the 2017-20 period.
Also, many pharma companies got warning letters from the US Food and Drug Administration (FDA) for compliance issues for specific production facilities. As a result, pharma companies could not sell certain drugs from these production facilities in the US market.
Due to pricing pressures in the US market and compliance issues for production facilities, the margins of pharma companies saw a contraction. As a result, some pharma companies reported a fall in profits and even net losses during some quarters.
Return potential of healthcare and pharma funds
In 2021, some healthcare and pharma mutual funds did well, along with technology mutual funds. The table in the above section shows how some of the healthcare and pharma mutual funds have given returns of around 25% CAGR in the last three years. These are good returns for investors of healthcare and pharma funds.
Advantages of healthcare mutual funds
During the Covid-19 pandemic, many hospitals, pharma, and diagnostics companies saw a surge in demand due to millions of people contracting the virus. In the last two years, diagnostics companies have done well as there is a lot of demand for Covid testing.
As the pandemic is receding, people are once again visiting hospitals for non-covid related health procedures. As a result, hospitals, diagnostics, and pharma companies are expected to do well in the foreseeable future. It is expected to boost the share prices of healthcare companies and the net asset value (NAV) of healthcare and pharma mutual funds.
If you invest in a good healthcare mutual fund, it has the potential to give you inflation-beating high returns and thus create wealth for you.
Reasons to invest in pharma mutual fund schemes
Some of the reasons for investing in pharma mutual funds schemes include:
- It gives you a minimum of 80% exposure to the healthcare and pharma sector, which is doing well currently and has the potential to continue to do well in the foreseeable future. Healthcare and pharma mutual funds have the potential to create long term wealth
- Favourable tax treatment of an equity mutual fund scheme
Asset allocation: Diversification is the key
A healthcare and pharma fund will give you exposure to only healthcare companies and hence has concentration risk. As per the asset allocation strategy, you should diversify within and outside the equity asset class. Within equities, your investment portfolio should have exposure to other sectors apart from the healthcare and pharma sectors. You can do that by investing in diversified large, mid, and small-cap mutual fund schemes. Outside equities, you should diversify into debt, real estate, gold, etc.