Dump medical cover for pharma funds
Buying a mediclaim? Well, a better option is investing in pharma funds, particular if you are young. For the uninitiated investors, it may sound an outlandish idea, but a look at the long-term track record of pharma funds says otherwise. Nilesh Shah, managing director of Kotak Mahindra Asset Management Company, says: “The payoff of investment in pharma fund SIP would be far in excess than insurance benefits.
“Due to pollution, stress, lifestyle our consumption of medicines would go up substantially compared to the past. This will create a secular demand for medicines, healthcare and preventive healthcare. My suggestion to people would be that instead of paying premiums to buy healthcare, I would ask them to do a SIP in a pharma fund. Of course the assumption is that you don’t fall ill in the early years. Normally at a younger age the chances of falling ill are that much less.
Look at the long-term return of pharma funds. Reliance Pharma Fund’s 10-year return is 20.73 per cent, SBI Pharma Fund’s 13.68 per cent, UTI Pharma Fund’s 14.43 per cent.
Pharma stocks are a safer bet in the long run. Risk averse investor tend to allocate money to pharma stocks as it is a defensive sector as medicine demand is not seasonal like cement. Also, medicine demand cannot go down. The BSE Healthcare Index return has been seven times positive and above 15 per cent to as high as 69.18 per cent in the past 10 years. In the past 10 years, the BSE Healthcare Index fell only twice, in 2011 and 2008. The index has given phenomenal yearly returns of 69.18 per cent in 2009; 47.43 per cent in 2014; 38.53 per cent in 20-12; 34.19 per cent in 2010; 22.55 per cent in 2013; 21.74 per cent in 2006; 16.52 per cent in 2007 and 15.06 per cent in 2015.
The Nifty Pharma Index has given negative return first time this year in the last five years. Its returns were 9.26 per cent in 2015; 43.42 per cent in 2014; 26.51 per cent in 2013 and 31.88 per cent in 2012.
But not all agree with Shah’s suggestion of going for an SIP in pharma fund instead of buying medical insurance. “Mediclaim or medical insurance is a vehicle which mitigates risk for a small premium. Pharma funds can help in case of escalating medicine cost (not medical cost) if the medicine price is going up 10 per cent year on year. But in a situation like a heart operation such investment may not meet the medical cost,” said Suresh Sadagopan, founder and chief financial planner, Ladder 7 Financial Advisories.
As the pharma/healthcare indices have stocks of firms which are diverse, with 30-40 areas of medical specialisation and each firm specialises in a select area like bulk drug, formulations and core research, returns are not the same. If one invests in a pharma fund and return from the fund is 25 per cent while the medicine cost goes up by 5 per cent, it will work, but even reverse can be true,” he said.
C R Chandrasekar, co-founder and CEO, Wealth India Financial Services an online mutual fund distributor, said, “We don’t recommend thematic funds at all, like banking or retail for that matter as they are too seasonal and too aggressive, we rather sell balanced funds, diversified fund or equity funds.” “But who ever wants to take a bet on thematic funds should allocate 10 per cent or less to such funds.”
Its not absolutely necessary to own a pharma fund or pharma stocks to meet medical costs, a direct co-relation is not absolutely true as pharma firms are growing at different pace, some may be very profitable but in other cases the cost of ingredients may mar their profit margins, Sadagopan said.
For people beyond the age of 60 or 70 years, getting a medical insurance is technically possible but the premium is very high, experts said, adding that for 75-80 year-olds probability of sickness is high and so is the premium cost, here having investments in mutual funds be it pharma fund or any other equity fund or even a bond fund based on their risk appetite is advisable.
Prakash Praharaj, founder and chief financial planner, max Secure Financial Planners, says, " Medical insurance covers health risk while investment in a pharma fund covers the market risk, so both are incomparable, though both are going to compensate the medical cost. Pharma fund one can go for only if one has the risk appetite, one cannot go for such fund if the risk appetite is low, medical insurance will work better for low risk appetite people or they can choose a liquid fund or a bond fund.
Pharma stocks had bad year in 2016. Pharma stocks were marred by US FDA’s adverse observations on companies’ plants. The BSE Healthcare and Nifty Pharma indices fell the most among the sectoral indices in 2016. The BSE Pharma Index return was negative 13.08 per cent while NSE Pharma Index gave a negative return of 14.30 per cent.
Pharma funds have given negative returns in 2016, led by Tata Mutual Fund’s Tata India Pharma and Healthcare Fund (-14.65 per cent), SBI MF’s SBI Pharma Fund (-14.02 per cent), Reliance MF’s Reliance Pharma Fund (-10.58 per cent) and UTI MF’s UTI Pharma and Healthcare Fund (-9.71 per cent), according to Value Research data.
raviranjan @mydigitalfc.com
Columnist: 
Ravi Ranjan Prasad
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