In April 2020, when the world was grappling with the COVID-19 pandemic, I wrote a piece: Will Pharma Funds Prove to be the Antidote for Your Mutual Fund Portfolio. It’s been over three years since, and the S&P BSE Healthcare Index has moved impressively from March 2020 lows, indicating that pharma and healthcare as a sector has been a large beneficiary and generated wealth for investors.

Last year in 2022, pharma and healthcare took a plunge. However, once again, this year, from March 2023 end the sector has participated and done impressively well in the market rally –in fact, it has scaled to an all-time high.

Graph: Movement of the S&P BSE Health Care – TRI vs. the S&P BSE Sensex

Base = Rs 10,000
Data as of August 8, 2023
Past performance is not an indicator of future returns.
(Source: ACE MF, data collated by PersonalFN Research) 

You see, although the World Health Organisation (WHO) announced in May 2023 that COVID-19 is no longer a public health emergency of international concern, pharma and healthcare (which includes medical equipment and device manufacturers, hospitals, laboratories, telemedicine, medical tourism, health insurers, etc.) is a non-cyclical and defensive sector. There will be demand, irrespective of an economic upturn or downturn. For this reason, defensive and non-cyclical sectors are considered relatively safe and potentially profitable than cyclical ones (whose performance is closely linked with the economy).

India’s health expenditure in FY23 has been 2.1% of GDP, 2.2% in FY22, as against 1.6% in FY21, according to the Economic Survey 2022-23. In the Union Budget 2023, allocated the Ministry of Health and Family Welfare has been allocated Rs 89,155 crore (USD 10.76 billion), an increase of 3.43% compared to Rs 86,201 crore (USD10.4 billion) in 2021-22. Besides, human resources for health and medical education are allotted Rs 6,500 crore (USD 780 million).

In the coming years, according to the Economic Survey 2022-23, India’s domestic pharmaceutical industry is estimated to be USD 30 billion by 2030, as it has sustained the growth momentum even after the COVID-19 pandemic. Currently, India ranks third in pharmaceutical production by volume, playing a prominent role even in exports. As regards generic medicines are concerned, India is the largest provider. The current Production Linked Incentive (PLI) scheme supports Active Pharmaceutical Ingredients (APIs), Key Starting Materials (KSMs) and Drug Intermediates (DIs). The Atmanirbhar Bharat wave will potentially help Indian pharma companies cut back their Active Pharmaceutical Ingredient (API) import dependence on China.

Given these encouraging data points and facts, pharma and healthcare as a sector is attracting domestic and foreign investments. Moreover, we have a talent pool of scientists, doctors, and other medical professionals.

How have mutual funds investing in pharma and healthcare sector stocks fared?

Well, many mutual fund schemes have been beneficiaries of India’s growing pharma and healthcare sector. Topping the performance chart on 3-year and 5-year returns, plus outperforming the category average, and their respective benchmark indices are pharma and healthcare mutual funds such as:

  1. SBI Healthcare Opp Fund,
  2. DSP Healthcare Fund,
  3. Nippon India Pharma Fund,
  4. Tata India Pharma & Healthcare Fund,
  5. Mirae Asset Healthcare Fund, and
  6. ICICI Prudential Pharma Healthcare & Diagnostics (P.H.D) Fund

In other words, against the risk taken (as revealed by the Standard Deviation), they have rewarded investors with respected risk-adjusted returns (as denoted by the Sharpe Ratio).

Portfolio analysis of Pharma and Healthcare Funds reveals that most of them are broadly investing in five types of businesses: Pharmaceutical companies, chains of diagnostic centres, hospitals, insurance companies, speciality chemical producers, and API manufacturers. So, there is fair exposure across the entire spectrum of companies that can benefit from higher healthcare spending.

Table 1: Performance of Pharma and Healthcare Funds

Scheme Name AUM (Rs in Cr.) Abs. Returns (%) CAGR (%) Risk Ratios
6 Months 1 Yr 2 Yrs 3 Yrs 5 Yrs Std. Dev. Sharpe
SBI Healthcare Opp Fund 1,973 27.27 33.23 10.32 19.89 19.86 16.39 0.28
DSP Healthcare Fund 1,370 19.60 26.63 8.98 19.07 16.07 0.27
Nippon India Pharma Fund 5,392 26.79 27.17 6.87 18.98 19.88 16.46 0.24
Tata India Pharma & Healthcare Fund 641 24.92 25.40 8.51 18.72 19.43 15.89 0.25
Mirae Asset Healthcare Fund 1,684 23.18 19.91 6.20 18.26 21.91 16.31 0.24
ICICI Pru Pharma Healthcare & Diagnostics (P.H.D) Fund 2,882 27.63 25.49 7.44 18.16 20.03 15.65 0.24
Aditya Birla SL Pharma & Healthcare Fund 489 25.47 23.62 5.69 15.65 16.13 0.19
UTI Healthcare Fund 782 24.78 23.97 5.02 15.49 16.93 16.45 0.20
LIC MF Healthcare Fund* 54 20.17 13.46 0.85 10.93 15.73 0.12
ITI Pharma & Healthcare Fund 140 21.72 22.40 14.89 0.04
Category Average Returns 24.15 24.13 6.65 17.24 19.67 16.00 0.21
S&P BSE Health Care – TRI 26.63 22.87 4.42 15.48 15.14 16.52 0.19
Nifty Healthcare Index – TRI 25.09 21.19 5.03 15.08 -0.03
NIFTY PHARMA – TRI 26.68 21.54 4.49 12.02 11.71 17.17 0.11

Data as of August 8, 2023
*Erstwhile known as IDBI Healthcare Fund
The list above is not exhaustive.
The securities quoted are for illustration only and are not recommendatory.
Direct Plan-Growth option considered.
Returns considered are point-to-point and expressed in %.
Returns over 1 year are compounded annualised; else absolute.
Standard Deviation indicates Total Risk, while Sharpe and Sortino Ratios measure the Risk-Adjusted Return. They are calculated over a 3-Yr period assuming a risk-free rate of 6% p.a
Past performance is not an indicator of future returns.
The table above is NOT a recommendation as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF; Data collated by PersonalFN Research) 

Other than Pharma and Healthcare Funds (which have a specific mandate to invest in stocks of this theme), the diversified equity mutual funds having exposure to Pharma and Healthcare stocks also have gained.

Table 2: Top-5 Diversified Equity Funds Having Exposure to Pharma and Healthcare Sector

Scheme Name % Exposure to Pharma & Healthcare Stocks
Motilal Oswal Long Term Equity Fund 17.54
Motilal Oswal Large & Midcap Fund 17.47
DSP Top 100 Equity Fund 16.01
Samco ELSS Tax Saver Fund 15.87
PGIM India Small Cap Fund 15.03

Data as of June 2023 portfolio of the respective schemes.
The list above is not exhaustive.
The securities quoted are for illustration only and are not recommendatory.
Direct Plan-Growth option considered.
The table above is NOT a recommendation as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF; Data collated by PersonalFN Research) 

Motilal Oswal Long Term Equity Fund (an ELSS mutual fund), Motilal Oswal Large & Midcap FundDSP Top 100 Equity FundSamco ELSS Tax Saver Fund, and PGIM India Small Cap Fund are some of the diversified equity mutual fund schemes with exposure to pharma and healthcare.

Table 2: Midcap Funds have a higher exposure to Pharma and Healthcare Stocks

Scheme Type % Exposure to Pharma & Healthcare Stocks
Largecap Funds 5.02%
Midcap Funds 8.05%
Smallcap Funds 7.39%

Data as of June 2023 portfolio of the respective schemes.
The list above is not exhaustive.
Direct Plan-Growth option considered.
The table above is NOT a recommendation as such. Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF; Data collated by PersonalFN Research) 

The largecap mutual funds have 5.02% exposure to pharma and healthcare, while midcap mutual funds and smallcap mutual funds have around 8.05% and 7.39%, respectively.

So, if your mutual fund portfolio already has decent exposure to Pharma and Healthcare, you need not add a separate pharma and healthcare fund.

[Read: 7 Best Mutual Funds to Invest in 2023]

Only if your existing mutual fund portfolio does not have exposure to the pharma and healthcare sector, then maybe a small portion (around 5%) could be invested in a Pharma and Healthcare Fund, provided you are willing to assume the very high risk of a sector/thematic fund and have an investment time horizon of at least 7-8 years. Avoid going gung-ho when investing in Pharma and Healthcare Funds per se to steer clear of the concentration risk. Be a thoughtful investor.

Given the defensive nature of this sector and that it is non-discretionary and non-cyclical, wherein the performance is not linked to whether we are in a boom or recession, decent returns may be earned.

Happy Investing!

This article first appeared on PersonalFN here


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