The pharma sector has been shining in glory ever since the covid 19 weighed heavy on us. As a result, the sectoral pharma mutual funds are booming as an opportunity to generate profitable returns.
What are pharma mutual funds?
Pharma mutual funds are a type of mutual fund that invests most of the money in stocks of pharmaceutical and healthcare companies.
If you are looking for a new opportunity for wealth creation or thinking of an aggressive investment in line with your risk tolerance, you can invest in pharma funds.
However, there are certain things you need to consider before you make the final step of investment.
- Take into account the risk factor: Investing in sectoral funds, in this case, Pharma, means taking an intended risk in one sector. There is a high risk involved in sector funds. To invest in the pharma sector, investors should have an appetite to bear higher risk levels. If you are a new investor and inclined toward investing in the pharma mutual funds, make sure you do research and risk analysis before investing. Once you are confident enough to invest in pharma funds, then only consider putting your money.
- Lock-in period: Pharma funds tend to give better returns over time. If you want to play in the short-term arena, Pharma mutual funds are not for you. Consider investing in the pharma sector only if you wish to stay invested in pharma mutual funds for a longer run. Also, consider your exit strategy from the investment when putting money in pharma funds.
- Select your way to investment: There are two ways to invest in mutual funds, Lump-sum and Systematic investment plan (SIP). You can choose a Lump sum and put all the intended money at once. However, in the case of pharma funds where high risk is involved, you may consider investing through a SIP. It will help you space out your investment in the pharma fund over some time.
- Track record of mutual fund house & fund manager: Expertise of AMC and find manager can make or break your investment planning. Hence, you need to consider checking the track record of the AMC and ensure they have a good reputation among investors before investing in pharma funds.
- Expense ratio: It is basically a fee taken by the fund house to manage your mutual fund. Expense ratios are an essential factor to look for in a mutual fund as it impacts your ultimate returns. But, with good research, you can turn it into a value-for-money aspect.
- Performance of the fund with its peers: For investing in the best pharma mutual funds, it’s crucial to compare the performance of your preferred fund with some of the established peers in the category. It will help you figure out its position among its category funds. Also, it will help you get an idea of whether the fund can give better returns as compared to the peers or not.
- Investment timeline: If an investor meticulously plans his entry and exit strategies, he can easily minimize his losses and achieve his financial objectives. In the case of pharma funds, you should consider investing funds only if you intend to stay invested for a longer time. Having a longer investment term is the only way to minimize the associated risks. Make sure to have an investment timeframe of five years as these funds are associated with higher levels of risk.
- Diversification: Pharma funds are sectoral funds, so it’s evident that investors don’t get diversification benefits from investing in pharma mutual funds as the portfolio is concentrated on the pharma and healthcare sector. Also, remember that sectoral funds cannot perform well across all market cycles. If you still wish to invest in these funds to get the exposure, you should restrict your exposure towards these funds to under 10%.
Given the pharma sector’s current performance, it’s evident that there is a long-term potential that investors cannot ignore. However, being a high-risk and volatile sector, there can be changes you could lose money if the pharma sector underperforms. Hence, investors should put their money in pharma funds only if they have a high-risk appetite.
Else, if you want to Invest in pharma funds only because your overall equity portfolio doesn’t have sufficient exposure to the healthcare sector, know that pharma funds bet on one particular investment sector and are a risky investment. You may invest if it matches your risk tolerance.
Do not invest in pharma funds because you expect strong growth from the pharmaceutical and healthcare sector. Make sure you do a thorough research of pharma funds before investing. If you are confident that you can bear the high risk associated and stay invested in the longer run, then you can think of investing in these funds.