ARTI ARORA CFP CM | HEAD FINANCIAL PLANNER
Pharma funds have been in vogue since the start of the covid phase and continue to be one of the most searched and discussed subjects everywhere even today.
Should a low risk investor or an investor with a conservative risk profile invest in Pharma funds?
Well, the answer is yes and no both and depends entirely on the portfolio management approach one is adhering to.
If it is a core & satellite approach, these pharma funds ought to be a part of the satellite holding so that your portfolio benefits from the above average returns these funds have been delivering in the last 12-18 months and there is still some potential for the upside that you can benefit from.
If you follow a buy and hold strategy for managing your portfolio, in that case this call can be taken depending on your investment horizon and if the horizon is longish, a part of the portfolio can be invested in the pharma funds for the kicker effect on overall portfolio returns.
If you are not following any specific strategy to manage your portfolio and invest randomly, the assessment of your risk profile gains further prominence. Investing on hearsay or because a certain type of fund has been making newspaper headlines is neither suggested nor warranted.
After having gone through the risk profiling process, if you deduce that you are a low risk investor, there are a few things to keep in mind at all times:-
- Do not take concentrated bets in your portfolio. Investing in sector funds such as the pharma funds is a high risk proposition and is clearly mismatched to your profile.
- If you have thoroughly studied the avenue and are sure of its way ahead, a small part of your portfolio can be invested in such funds and if possible through the systematic investment plan route in place of lump sum investment. This reduces the overall risk of investing in such avenues.
- Being clear about your investment horizon helps a great deal as market has its own cycles and inherent volatility that gets ironed out in a long term investment horizon.
Last year’s rally in the returns from Pharma funds was anticipated due to the epidemic situation that emerged as a global crisis. The Pharma Funds became the chosen theme and favored Investment Avenue for most advisors and investors. That last year was an exception must be clearly understood and any investment decision that one makes must be backed by thorough research and efficient advisory at all times.
Risk profiling is an elaborate scientific process with various elements as sub sets of it including the current portfolio, investment horizon, investment behavior and of course a series of psychometric tests that bring forth the investor risk profile in a very calculated manner.
If an investor falls anywhere between conservative or low risk investor profile to balanced or moderate risk profile, the percentage allocation to Pharma funds must be kept in check at all times and should not exceed more than 15-20% of the total investment portfolio at any point in time.
As one moves from balanced to moderately high risk category, the cap could be put around 25% at max. The above suggested allocation is only indicative and should be followed or adhered to only after extensive research by self or on advice from an experienced and qualified advisor or planner.