Nevertheless, investors in the three-pharma funds continue to stay invested despite the poor performance, as reflected by their steady unit capital.

Healthcare is a basic necessity and demand for pharma products is likely to increase as awareness levels rise. The large Indian population further lends credence to the defensive flavour of the sector. With perennial demand, alongwith organised health care infrastructure and insurance in future, is expected to give a further fillip to the sector's earnings.

Besides, the Indian pharma sector boasts of both subsidiaries of leading global players and domestic companies, which are spreading to international markets. While the sector offers immense potential, investors may have to wait a little longer before their pharma funds deliver a reasonable return.

"I think investors should hold any equity fund for at least five years. In this period, I expect the effects of valuation cycle as well as demand cycles to even out and only the performance of companies in the portfolio to reflect in stock prices,'' says R Sukumar, fund manager, KP Pharma.

Indian pharma companies are intensifying their focus on research and development as the deadline for compliance to WTO norms fast approaching. In addition, given the reverse engineering skills of Indian companies, the market for generic drugs will also open new vistas. And as the sector is highly fragmented sector, mergers and acquisitions are expected to drive up their valuations.

"M&A activity is already happening at a steady pace. American Remedies was, recently, acquired by Dr Reddy's Laboratories. MNCs like HMR, Glaxo, Knoll and Pfizer have seen hightened activity, induced by their parents. A lot of brands have also changed hands. I expect this to continue for the next few years,'' says Sukumar.

Despite its defensive nature, pharma sector is fraught with a number of risks, including government policies on price control, delays in introducing a well-defined patent regime and lack of proper health facilities. Further, with rapidly changing dynamics of the sector, a blind bet on any stock is surely not the pill to success. Hence, if you would like to boost your portfolio's exposure to drug and healthcare stocks, route your investments through pharma funds since fund managers are better equipped to identify opportunities and trends in the sector and pick up the right stocks.

Launched in April '99, Kothari Pioneer Pharma Fund is currently ruling below par at Rs 9.81. The fund invests in those stocks, which are undervalued, considering their potential to tap opportunities in domestic and international markets. The fund manager does not limit investments to a few segments of the pharma sector but sees opportunities in all of them. KP Pharma has increased allocation to MNC stocks since the fund manager believes that they have the potential to re-engineer themselves and grow in medium-term. The top 5 holdings of the fund account for 45-50 per cent of the portfolio. The fund carries a 2 per cent entry load while exit is at NAV.

SBI Magnum Pharma Fund, launched at the same time as UTI Pharma & Healthcare, is marginally above par. While the fund has held an average 25 per cent in cash through the second half of 2000, it has almost equally divided its exposure between Indian and MNC stocks. The fund currently has a size of Rs 19 crore. The fund carries 1.75 per cent entry load while the exit is at NAV. If you are not comfortable investing your money in a 100 per cent pharma fund, there are a few funds like Alliance Buy India, Birla MNC and K MNC, which with a reasonable exposure to pharma stocks will help you participate in the growing sector.