Prospects
One look at the returns from the pharma funds and you would pass it off as a dud investment. Except UTI Pharma and Healthcare, the other two funds from SBI and Kothari Pioneer AMCs are ruling below par with the Value Research one-year sector average at (-) 21.89 per cent. However, this is just one part of the story.

With all the three funds launched only in 1999, it is still early days to pass a judgement on their performance. Immediately on launch, the troika was faced with a rather lacklustre year for the pharma industry posted tepid growth numbers. There were some other potholes along the way. The markets went ga-ga over technology stocks earlier this year, only to trigger a crash in early April. No wonder, this spoiled the sentiment for other sectors and pharma stocks with their latent potential went unnoticed. The poor returns in the short-term apart, pharma funds today are indeed a worthy investment option. Without getting into the tongue-twister jargon of the pharma industry, the impact of WTO and the new path breaking discoveries being made in laboratories, there is a simple yet compelling case for investment in the sector.

Given the over one billion population of the country, pharma companies are expected to log in steady growth for years to come. Since awareness about health and hygiene is low, there is a huge scope for improvement and this will add to the bottomline of the pharmaceutical industry. Besides, as affluence in the society steadily rises, so will the expenditure on healthcare. Surely, the returns are there for the taking in the long-term.

"The prospects for the sector are pretty good with most companies growing at a respectable rate this year after slack figures last year. Add to it, the valuation cycle of the sector is at a low and hence, is an attractive investment destination,'' says R Sukumar, fund manager, Kothari Pioneer Pharma Fund.

"Compared to the FMCG sector, which is growing around 5-6 per cent, it's a double digit growth for the pharma sector while valuations are lower than those of FMCG companies. This makes the sector look all the more attractive,'' he adds.

Add to it, the top pharma company in India only has a 10 per cent share since the industry is fragmented with as many as 20,000 companies. Thus, there is a definite case for mergers and acquisitions in the sector, as companies look to consolidate and increase market share. This is bound to pep up returns from the sector.

Investing via funds
But why should investors route their investments through pharma funds rather than investing directly in stocks? Given the complexity of the sector, it is indeed a good idea to put your money in a fund and let the fund manager do decide what is best for you.

From bulk drugs to formulations to biotechnology, the chatter is sure to leave you dazed and gaping for answers. We all know about bluechip pharma companies like Glaxo, Cipla, Ranbaxy and Dr Reddy's and some of their famous brands. However, this iota of knowledge will not help us take an intelligent investment decision. Hence, let us leave it to the fund manager, who closely tracks the sector and is well versed with the nuances of the industry.

"While investing in a pharma fund, an investor must look for diversified portfolio of well-known companies and a single stock should not account for more than 10 per cent of the portfolio,'' says Mr Sukumar.

The short-term lacklustre returns notwithstanding, the pharma sector is poised to deliver handsome returns as more opportunities unfold. To arrive at the long-term returns from the portfolio, we constructed a portfolio of ten pharma stocks and took their adjusted prices for a five-year period (starting November 24, 1995). The portfolio has given an impressive five-year annualised return of 27.25 per cent. On the other hand, the S&P CNX Nifty Total Return (adjusted for dividends) has given a return of 8.5 per cent during the same period.

That apart, while pharma sector may not give you ballistic returns like those from the much fancied technology stocks, the sector is also lot less volatile and thus, there is little chance of gyrating NAVs giving you sleepless nights. While dedicated funds are the right prescription for a pie in the pharma industry, invest for the long-term if you desire sweet returns from a bitter portfolio!