Pharma Mutual Funds: Top Performing Pharma Mutual Funds, Taxation, Risk and Returns

PHARMA MUTUAL FUNDS

Pharma mutual funds are also referred to as healthcare funds. They specifically invest in companies belonging closely to or related to the healthcare sector. The fund aims to offer high returns on the invested funds through varying business cycles. Despite being risky sometimes, these funds tend to generate decent returns in the long term as it is one of the industries that undergo constant long-term growth due to the introduction of modern tech, continuously increasing population, and the latest studies and research. 

These are a part of sectoral funds which invest in specific sectors. They target specific economic themes and focus on capital appreciation and income generation by investing mainly in their chosen sector. One of the most significant sectors in India post the pandemic is Pharma and healthcare. 

In this article, we are going to discuss various aspects of pharma funds and gain a better understanding of the same. Let’s get started.

TOP PHARMA FUNDS TO INVEST IN 2024

MERITS OF PHARMA FUNDS

1. Focused:

Pharma funds as any sectoral fund are focused particularly on one sector. There does not exist so much diversification. All sectors go through market volatilities and cycles and perform accordingly, and when a particular sector is booming, funds that focus on growth sectors give maximum returns and grow beyond the margin from the benchmark and other funds. The Pharma sector has given astonishing returns over a long period now. 

2. High returns:

Pharma funds have the main aim to outperform equity funds by staying invested in the Healthcare sector as it is one of the booming industries in India as of now. All sectoral funds have the prime aim to outdo diversified funds if the fund corpus is invested in a specific sector which is expected to grow in recent years. If this agenda fails, the fund may suffer a heavy dent but may beat the market returns of other funds if that sector boosts up. Hence, there exists a high risk-reward ratio. 

3. Investment pan market cap:

It is focused on one specific sector but not one capitalization. It invests predominantly in healthcare-based shares but entities of all sizes varying from small and mid cap to large cap. It depends on different AMCs and schemes if they would invest a major chunk of the corpus in any one market cap or go forward with diversifying throughout. 

RISKS ASSOCIATED WITH PHARMA FUNDS

Pharma Mutual Funds are associated with high levels of concentration risks as they allocate the funds mostly towards stocks of healthcare and pharma companies. Apart from that, like any other fund, these funds also carry volatility risk and market risk. 

Market risk is the possibility of the investment worth getting down due to adverse situations or developments in the market and volatility risk is the possibility of the investment value getting reduced due to a sudden change in the price of the underlying stocks. 

TAXATION OF PHARMA MUTUAL FUNDS

As per the budget amendments, the dividends offered by all the funds are taxed classically and traditionally. They are added to the overall income of investors and taxed as per the applicable income tax slab rates. 

Previously, dividends in the hands of investors were tax-free as the AMCs paid DDT which is the dividend distributions tax. 

Investors realize STCG on selling the fund units within a holding period of a year. These gains are taxed up to Rs. 1,00,000 a year and are tax-free. Anything over and above this limit attracts tax @ 10%, and there is no benefit of indexation provided. 

THINGS TO CONSIDER 

1. Past Performance:

Measuring the performance of the fund in both bearish and bullish phases is a mandate as it helps investors select reliable funds. Pharma funds have grown in recent times due to the pandemic and hence are very popular among investors. India with a strong healthcare base and a developing economy has seen some high returns from investments in this field. Nevertheless, it must be vouched if a fund can continue to perform in upcoming market cycles. 

2. Involved Costs:

There are different costs involved in funds such as entry and exit load, expense ratio, etc. Investors must review these costs before going forward with investments. 

3. Financial Goals:

Setting up a goal before investing is the foremost and most important decision to make. It is very significant to evaluate that the fund objective is aligned with the financial goals. If investors can analyse the Pharma and Healthcare sector and are up for taking risk then they may invest in these funds as it is a high risk - high return fund. 

4. Other basics:

There are other different influencing factors such as the Assets Under Management, and Net Asset Value among others which are to be viewed to take comfort over reliability and investor engagement in the fund. 

WHO SHOULD INVEST?

1. Investors have a high risk appetite as the returns are solely dependent on the performance of a single sector which is Healthcare.
2. Investors have long-term investment tenure (at least 5 to 6 years) as the equity securities are quite sensitive to market fluctuations in the short tenures.
3. Before opting for investment in these funds, investors should do proper research and analysis of the future and current market situation and growth prospects of the companies in the funds and sector. The decision should be based on multiple factors related to the sector.