Pharma Funds: Investment Potential

Investors often assume that investing in the pharmaceutical sector is a safe bet given that its products and services are always in demand. However, investing in pharmaceutical funds requires a constant study of the market and the sector. Moreover, as they are more focused ona single sector, they offer no diversification benefit. Hence, even though they offer potentially higher risk, their underlying return is also on the higher end. Therefore, before you head towards investing in them, understand your risk profile, investment objectives and time horizon

The Indian equity market, over the past few quarters, has witnessed substantial gains. This has resulted in heightened inflows into equity mutual funds. One important trend is sectoral or thematic mutual funds that are capturing investors’ attention, drawing in nearly ₹14,000 crore of inflows in the last five months. On a year-to-date (YTD) basis, sectoral or thematic funds had a cumulative net inflow of ₹22,871 crore.

This surge signifies a growing interest among investors willing to take on higher risks for potential rewards. Recent data from the Association of Mutual Funds in India (AMFI) highlights a shift in these funds’ fortunes, as indicated in the table below:

After a withdrawal of ₹169 crore in May, sectoral or thematic funds have consistently seen inflows since June 2023. In the month of October, thematic funds got a huge inflow of ₹3,896 crore, the second highest among equity categories. These sectoral or thematic funds focus on specific sectors or themes and are for investors comfortable with higher risk. In this article, we would be speaking about one of the standout performers of 2020 that experienced a downturn from August 2021 to March 2023. Nonetheless, it started to rebound at the onset of the financial year 2024. Indeed, we are talking about pharmaceutical funds.

The Nifty Pharma index surged from a low of 11,542.45 to a high of 16,279.10, resulting in impressive absolute returns of 41 per cent over a mere nine-month period. Concurrently, pharmaceutical funds delivered an average return of 38 per cent during this timeframe. Such a significant growth might instigate a fear of missing out (FOMO) among numerous investors.