Should you join the sectoral funds growth bandwagon?

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For many years, the Indian pharmaceutical sector has been mired in the tangle of regulatory difficulties, competition, pricing pressures, and enormous R&D investments that did not result in revenue visibility. However, the Indian Pharmaceuticals had a complete bull cycle from 2009 to 2015, followed by a significant slump from 2016 to 2019.

Data from the S&P BSE Healthcare index show a double-digit yearly increase in the years 2013 (23%), 2014 (47%), and 2015 (15%), as well as in previous years since 2009.

However, from 2016 to 2019, just a single negative digit return was recorded. From a low base of profits and earnings in the year 2020, pharma stocks saw a massive roar from the beginning of January 2020 till June 23, 2021; the S&P BSE Healthcare index has given returns of 85%. That said, India’s asset management firms are following the same pattern.

The value research data shows that the sectoral pharma fund has given returns of 49.61% (Absolute return), for 1 year and 25.01% (Annualised return), and 13.89% (Annualised return) over 3 and 5 years as of June 22, 2021 as the domestic businesses have seen improvement in margins on the back of new product launches and scale leverage.

Similarly, the Sectoral Technology Fund has done quite well in terms of performance. The absolute returns in just one year have been 105.33%, shows value research data. “Owing to reasons such as an increase in the Work From Home (WFH), change in business tactics, use of Artificial Intelligence (AI), cloud, online advertising and social media, increase in internet consumption and many more, the IT sector remained an outperformer. Looking at these factors, IT stocks will remain agile during the pandemic,” said Ravi Singhal, Vice Chairman, GCL Securities.

The banking and financial services space, too, did exceptionally well. But the Bank Nifty started moving up by Sept-Oct 2020, that is, with a lag after the frontline indexes had moved up quite a bit. As per the value research data under Equity oriented category, the sectoral banking fund has given returns of 58.19% (Absolute return), for 1 year and 7.39% (Annualised return), and 12.20% (Annualised return) over 3 and 5 years as of June 22, 2021.

“We need to bear in mind the fact that the performance of the sector and the overall growth of the economy are very closely linked. Better provisioning for and management of Non-Performing Assets (NPAs), less than expected NPA levels post the pandemic, gains through digital and retail banking, low cost of funds from the accommodative stance of the RBI, are all factors that helped the sector hold well against all odds,” said Joseph Thomas, Head of Research, Emkay Wealth Management.

What should be the course of investors?

As per the market experts, investments into sector funds carry much higher risk compared to normal diversified funds, and therefore, exposure should be initiated after careful study and consultations with professional advisors.

Currently, the index seems to be stalled at 32000 to 34000 levels. While financial experts see some downward pressures as corrections set in, they should be utilised as opportunities to buy the sectoral fund for the long-term portfolio.

“Nippon, SBI, and Mirae pharma & healthcare funds have been doing well. Whereas under Banking funds, ICICI Prudential, Sundaram, SBI and Tata banking funds have delivered commendable portfolio performances,” explained Thomas.