Pharma mutual funds top return charts across horizons. Should investors chase the rally or stay cautious?

Pharma mutual funds have emerged as the best-performing sectoral category across multiple time periods, including the last three months, six months, and in the current calendar year so far, an analysis by ETMutualFunds showed. However, after such a strong run, investors are wondering whether the sector can continue to outperform over the next 12 to 18 months or whether expectations have already been priced into stock prices.

Market experts said this performance was driven by strong earnings, improving export prospects, resilient domestic demand, and investors' preference for defensive sectors amid an uncertain global environment.

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Rajesh Minocha, a Certified Financial Planner (CFP) and Founder of Financial Radiance, shared with ETMutualFunds that the pharma rally appears to be driven by several factors: improved earnings visibility, reduced pricing pressure in the US generics market, strong domestic demand, and renewed investor interest in defensive sectors amid ongoing global uncertainty.

The outlook remains positive, but expecting similar returns over the next 12 to 18 months may not be realistic. Much of the re-rating has already occurred, so future performance will likely depend more on earnings growth than on further valuation expansion, Minocha said.

Another expert, Manish Kothari, CEO and Co-Founder of ZFunds, shared with ETMutualFunds that the sector continues to enjoy several long-term structural tailwinds despite the recent rally.

According to him, India's pharmaceutical industry continues to benefit from increasing healthcare expenditure, a rapidly ageing global population, greater demand for generic medicines, and improving domestic consumption. Indian pharmaceutical companies are also strengthening their presence in complex generics, specialty drugs, and contract manufacturing, which could support earnings growth over the coming years.

However, he cautioned that investors should not expect the pace of returns witnessed over the last few months to continue indefinitely. Kothari added that the sector still offers long-term opportunities, but returns are likely to become more earnings-driven as valuations have already improved following the recent rally.

According to the latest category performance data, pharma funds delivered an average return of 12.57% in the last three months and 20.22% over the past six months, outperforming every other domestic mutual fund category as well as international funds during these periods.

The category has also maintained its leadership in the current calendar year, generating an average return of 13.94%, making it the top-performing domestic mutual fund segment so far. International funds have outperformed it overall with an average return of 16.80% in CY2026.

Time to pick pharma funds or wait for a correction?

The sharp rally has raised an important question for investors: should those who missed the rally start investing now, or wait for better entry levels?

Kothari said for anyone looking to build exposure to healthcare as a theme, Systematic Investment Plans (SIPs) are a good tool. As a satellite or thematic allocation, exposure to pharma funds should typically be capped at around 10% of the overall portfolio.

He further noted that this can be higher on a case-by-case basis; for instance, where the allocation is being used deliberately as a hedge against healthcare inflation for an elderly investor or dependent, rather than as a pure return-seeking theme.

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Minocha added that timing sector-based funds can be challenging, and investors with a positive long-term outlook may consider investing through SIPs or Systematic Transfer Plans (STPs) instead of waiting for a potential market correction.

"For the pharmaceutical sector, consider it as a satellite allocation rather than a core holding. For most investors, maintaining a 5% to 10% allocation to sector funds within the equity portfolio is generally sufficient, depending on individual risk tolerance and existing sector exposure. The better option is to select good flexi-cap type funds and leave it to the judgement of the fund manager whether to buy into or sell the stocks of various sectors," Minocha said.

Are pharma fund valuations still attractive after the rally?

The sharp run-up in pharmaceutical stocks has inevitably pushed valuations higher, prompting investors to question whether the sector still offers attractive opportunities or if it has become expensive. Another debate revolves around whether pharma funds currently provide a better risk-reward proposition than other popular sectoral themes such as banking, technology, defence, and manufacturing.

Minocha said that valuations have increased following the recent rally, but they remain supported by stable earnings and sustained long-term healthcare demand. Rather than focusing solely on comparing sectoral funds, investors should recognise that each sector follows its own cycle.

While pharmaceuticals offer defensive characteristics, concentrated bets on a single sector are not advisable. A diversified portfolio remains the more prudent approach, he added.

Kothari noted that sectoral and thematic funds are concentrated bets, and switching between them based on recent rallies is just recency-chasing.

Asset allocation should always be goal- and horizon-based. It is more important to stick to SIP discipline through rallies, corrections, and every headline in between; that consistency is what actually compounds wealth, not sector timing, he said.

Will Trump's fresh pharmaceutical tariffs hurt Indian pharma funds?

Another key concern for investors is the potential impact of US trade policies on Indian pharmaceutical companies. US President Donald Trump announced a phased tariff plan for imported generic medicines, giving drugmakers a two-year reprieve before sharply higher duties kick in.

In a post on Truth Social, the US President wrote that all generic drugs being brought into the US will have no tariffs for a two-year period. Following that, the tariff will be raised to 100% from August 1, 2028, and then to 200% by August 1, 2029.

This development gains significance because Trump's earlier tariffs in the pharmaceutical sector targeted branded and patented drugs, with that policy remaining unchanged. Generic medicines were excluded from earlier measures, despite accounting for nearly 90% of prescriptions in the US.

The announcement offers temporary relief to Indian pharmaceutical companies, which generate a significant share of their revenues from the US generic drug market. The two-year tariff-free period gives Indian exporters more time to reassess their supply chains and investment plans.

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Trump said the phased tariff structure is intended to encourage companies to set up manufacturing plants and related infrastructure in the US during the transition period. Companies that do not localise production would eventually face punitive import duties, in line with the administration's broader "America First" manufacturing agenda.

The announcement comes as the Trump administration continues to push for changes in the pharmaceutical supply chain and reduce dependence on overseas manufacturing. It also complements the administration's most-favoured-nation drug pricing policy, which aims to bring US medicine prices closer to those in other developed economies. The policy covering patented and innovative medicines remains unchanged.

Kothari said the sector, particularly export-facing companies, is likely to remain volatile as long as this uncertainty persists, noting that markets tend to react to headline risk well before the actual mechanics of implementation, exemptions, or legal outcomes become clear.

Minocha added that how much it matters really depends on the final scope and implementation of the tariffs. Companies with significant exposure to the US market may face near-term uncertainty, while those with broader diversification are typically more resilient. Short-term volatility is expected, but longer-term results will still hinge on earnings growth, competitiveness, and execution, not on any single policy decision.

Anandha Padmanabhan, Senior Fund Manager (Equities) at PGIM India Mutual Fund, said: "We believe this is largely a negotiating tactic and is unlikely to be implemented in its current form. There is no immediate impact on Indian pharmaceutical exporters, as generic-drug exports remain tariff-free for the next two years."

Padmanabhan added that Indian manufacturers operate on relatively thin margins in the US and cannot absorb tariffs of 100% to 200%. Shifting large-scale generic manufacturing to the US is presently uneconomical and could increase drug prices and healthcare inflation in the US. Companies with existing or planned US manufacturing facilities could be relatively better placed if the proposal is eventually implemented.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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