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Sectoral pharma funds are a class of sector funds that invest majorly in equity-linked securities of pharmaceutical, healthcare companies and other firms involved in research and development of vaccines. We have covered the following in this article on the best sectoral pharma funds:
Sectoral pharma funds are a class of equity funds whose asset allocation is concentrated towards equity-linked securities of pharmaceutical and healthcare companies. Investing in these funds gives you exposure to a portfolio consisting of equities of leading pharmaceutical companies. The best sectoral pharma funds are those funds that have consistently outperformed their peers and beaten the broad benchmarks. The best funds stand out among others. The financial ratios of the best funds will be in much better shape than others, and they quickly catch the interest of the potential investors. Sectoral pharma funds are buzzing ever since the onset of the COVID-19 pandemic. Investors have pumped big money into this sector as these companies are playing a crucial role in developing a vaccine to treat the COVID-19 infection. The sector is expected to continue doing well in the near future.
The following table shows the best-performing funds based on the past 3-year and 5-year returns:
Since sectoral pharma funds concentrate their investments towards equities of pharmaceutical companies, they possess a high risk of concentration. These funds are expected to outperform the broader benchmark indices when the pharma and healthcare sector is doing well. However, on the flip side, losses related to these funds can be magnified when the underlying sector is not performing as anticipated. Therefore, investing in these funds is suitable only for those willing to bear higher levels of risk in exchange for the potential to earn good returns in the long run. Risk-averse investors may stay away from these funds.
As per the Budget 2020 amendments, the dividends offered by all mutual fund schemes are taxed in a classical manner. They are added to the overall income of investors and taxed at their respective income tax slab rates. Previously, dividends were made tax-free in the hands of investors as the fund houses paid dividend distributions tax (DDT).
You realise short-term capital gains on selling your fund units within a holding period of one year. These gains are taxed at a flat rate of 15%, irrespective of your income tax slab. Long-term capital gains are realised on redeeming your units after a holding period of one year. These gains of up to Rs 1 lakh a year are tax-free. Anything above this limit attracts tax at the rate of 10%, and there is no benefit of indexation provided.
Sectoral pharma funds are associated with higher levels of concentration risk as they allocate their portfolio mostly towards equities of pharma and healthcare companies. Apart from that, like any other equity fund, these funds also carry market risk and volatility risk. Market risk is the possibility of the worth of your investments falling due to the adverse developments in the market. Volatility risk is the probability of the value of your investments going down due to a sudden change in the price of the underlying securities.
You have to consider the following while investing in sectoral pharma funds:
a. Risk profile Individuals considering to invest in the pharma sector should essentially have an appetite to bear higher levels of risk of concentration. If you are a risk-averse investor, then these funds are not suitable for you,
b. Investment horizon You should have an investment horizon of longer than five years as these funds are associated with higher levels of risk of concentration. Having a longer investment tenure is the only way of mitigating the associated risks to a greater extent. It is advisable that you consider investing pharma sector funds only if your investment horizon is longer than five years.
c. Diversification You have to note that you don’t get the benefit of diversification on investing in these funds as their portfolio is concentrated towards the pharma and healthcare sector. Therefore, it is advisable that you restrict your exposure towards sectoral pharma funds to under 10%.
You get the following advantages by investing in sectoral pharma funds: