Is it a wise option to invest in pharma funds?

India is known for being a global manufacturer of generic medicines. Even many domestic pharmaceuticals and healthcare companies like Cipla and Biocon are on its way to search a potential cure for Coronavirus. Companies like IPCA, Cadila Healthcare and Dr Reddy’s are already working on this to manufacture hydroxychloroquine sulphate (HCQ) and chloroquine phosphate (CQP), which are believed to be a potential drug to treat Coronavirus. This has led pharma sector to flourish even in a pandemic situation. If we look at the year-till-date (YTD) performance of S&P BSE Healthcare Index then, we would observe that it has given returns close to 15 per cent. This has led many people to consider investing in pharma funds, which on an average, gave returns close to 19 per cent on YTD basis. But should you consider investing in them? We shall find it out in this article.

Pharma sector currently is in hype due to the developments around Coronavirus treatment. However, for this sector to sustain its performance, Coronavirus treatment should not be the sole factor for investing in it. This is because even when this hype gets over, there are various other factors such as drug regulations, pricing and approvals or rejections from USFDA that we need to consider.

Further, it is a well-known fact that when it comes to sector investing, no sector has consistently been on the top. The same can be seen in the table below:

As we can see in the above table, no single sector has consistently been on the top. The highlighted ones are those, which were the best performing sector in the respective years. Also, one cannot go by the analogy that the worst-hit sector will perform well even in the next year.

As far as investing in pharma funds is concerned, if you are an opportunist or searching for new opportunities to create wealth, then you can invest in pharma funds having a short-term investment horizon and try to exit in a staggered manner once the vaccine for Coronavirus gets developed. Further, do not allocate pharma funds or any sector funds for that matter, to your financial goals. Also, it is recommended that only moderately aggressive to aggressive risk takers should opt for them.