In 2022, pharma funds lost 9.68%. All the schemes in this category delivered negative returns last year. The underperformance is in line with benchmark Nifty Pharma index, which was down over 10.60% in 2022.
The reason for the poor performance was due to the rotational nature of cyclical sectors. Pharma funds did well during the Covid years. However, they have fallen out of favour lately. The sectors that collapsed during the pandemic like manufacturing and infrastructure are in fashion these days. When a sector becomes very attractive, money usually follows it rather than to others which have already done well like pharma.
“It was a rotation of sectors that has happened this year and pharma was already on a high base of earnings. Secondly, the sector also had some raw material impact due to sustained lockdowns in China,” said Shailesh Raj Bhan, CIO – equity, Nippon India Mutual Fund.
What should investors do?
“Healthcare is an integral part of a growing economy like India. With broad indications that healthcare as a percentage of India’s GDP may go up as the country progresses over the next few decades, we believe investors with extended long-term investment tenure and depending on the risk appetite, one may invest a part of their portfolio in such a theme,” said Vrijesh Kasera, Fund Manager, Mirae Asset Healthcare Fund.
“Launch of several niche products in the US market, stable US price erosion levels, decent product pipeline, favourable INR terms, stable growth from branded generic market and positive impact of lower raw material prices could drive the sector earnings going forward,” Kasera said.
“Domestic branded pharmaceuticals and branded emerging markets space offer a lucrative opportunity for Indian pharma companies. The earnings for the pharma and healthcare sector should be higher than what has been the case in the last 12 months. A normalised rate of 12-15% earnings growth should be possible for the sector in the next few years. This augurs well for pharma and healthcare funds,” said Shailesh Raj Bhan.
Mutual fund advisors usually ask conservative and new investors to avoid taking bets in sectoral and thematic funds. They say sectors and themes go through cycles and inexperienced investors would find it difficult to continue with their investments during lean phases. These investors should not consider pharma funds now because the outlook is good. Sector and thematic schemes are only recommended to aggressive investors who are comfortable with taking higher risk and ability to stomach lot of volatility. Timing entry and exit in these schemes are also extremely important because of the cyclical nature of the sector. Only well-informed and experienced investors can do that.
