Earnings growth across listed companies has dwindled, but one sector that has managed to buck this trend is pharmaceuticals. The healthcare and pharma sector however, is as diverse as it is complex. Good thematic funds investing in this sector are a good way to get around the stock selection challenge, while riding the theme.
Prime Funds, our list of recommended funds features two thematic funds focussed on the healthcare space. One of these – the HDFC Pharma and Healthcare Fund – is a recent addition that made its way into our BUY list only in January 2025. It is a relatively new fund, launched in October 2023. This report tells you why we added it.
Why Buy
#1 Pharma sector in a good place
The pharmaceutical sector has emerged from its challenges to demonstrate encouraging growth in FY24, driven by both export and domestic markets. The sector’s business, currently estimated to be over USD 50 billion, is projected to reach USD 130 billion by 2030, representing a significant growth trajectory.
Several key catalysts support this outlook – the anticipated US Biosecurity Act, an approaching patent cliff that will release high-value drugs into the generic market, and potential ‘China +1’ opportunities arising from US-China trade tensions.
The volatile US generics pricing environment is also expected to stabilize, while India’s expanding network of international trade agreements and supportive government policies provide additional growth drivers.
In the domestic market, formulations businesses have demonstrated resilience despite challenges and are positioned for sustained growth through both volume expansion and price hikes. The implementation of enhanced regulatory standards, particularly the revised Schedule M good manufacturing practices effective December 2025, can benefit established, organized players. These factors collectively support projected sector growth rates of 9-11% in 2025.
The HDFC Pharma and Healthcare Fund is strategically positioned to capitalize on this sector momentum. The fund’s portfolio has 34% invested in industry leaders focused on both exports and domestic markets, namely Sun Pharma, Cipla, Divis Laboratories, and Lupin Limited. This is higher than in many similar funds. This core holding provides comprehensive exposure to diverse pharmaceutical opportunities, spanning domestic formulations, generic exports, APIs, biosimilars, and CDMO/CRO services.
#2 Hospital and diagnostics boost healthcare component
Apart from owning the top pharma names, HDFC Pharma and Healthcare fund has broader exposure to hospitals and diagnostics stocks as well. These stocks have very different drivers from the above pharma companies, are entirely a domestic play and thus offer growth potential with less earnings volatility.
Hospitals in India are embarking on a capacity expansion initiative to address the surging demand. This is expected to yield positive results, as projections indicate that balance sheets will remain robust while key operating metrics will improve in the coming years. Anticipated operating leverage is likely to enhance overall efficiency and profitability.
In the diagnostics segment, which is asset-light and has a long growth runway, players have emerged stronger after a shakeout post-Covid. Facing challenges such as new market entrants and intense price-based competition, the sector has undergone a process of consolidation. The result is a landscape dominated by a select group of players who are now at the forefront of shaping the industry's future.
By maintaining a carefully curated exposure to select diagnostics stocks (5.9% of net assets in December 2024 in Metropolis Healthcare and Vijaya Diagnostic Center) and growth-oriented mid-sized hospitals (12% of the net assets in December 2024), the fund is well-positioned to potentially experience a significant performance boost.
#3 Performance - Capturing the rebound
Launched in September 2023, the fund is relatively new with a short track record albeit an impressive one. Fund manager, Nikhil Mathur, backed by 14 years of experience, has been managing this fund since its inception and has tracked the sector since at least 2018.
As of December 31, 2024, the fund has not only outperformed its benchmark, the broad-based 100-stock BSE Healthcare index, but also the Nifty Pharma and Nifty Healthcare indices. The fund's point-to-point returns for January to December 2024 stood at 51.76%, positioning it ahead of all its actively managed peers. The fund's launch timing coincided with a sector downturn and stock corrections, and it has positioned itself in exactly the right stocks to capture the rebound in the sector.
This has also meant that it has fared better than our other recommended healthcare fund - DSP Healthcare Fund, albeit over a short period. DSP Healthcare Fund has limited its exposure to pharma majors but holds global medical equipment makers. Due to this, the portfolio overlap between the two funds is only 34.8%.
Risks and Suitability:
The HDFC Pharma and Healthcare fund faces inherent risks associated with the sector. The pharma sector is complex, heavily regulated and features volatile earnings due to risks such as pricing pressures and FDA inspections. However the fund’s non-pharma exposures help mitigate this risk.
The fund also has a relatively short track record over which to gauge its performance and has not weathered a full cycle. This is important especially considering the fund’s market cap exposure is almost evenly split between large, mid and small. Small and mid caps are more susceptible to corrections during market downturns.
With an AUM of Rs. 1,577.12 crores, the HDFC Pharma and Healthcare fund is roughly half the size of the DSP Healthcare fund. It is also more expensive with a TER (direct plan) of 0.91% as against that of 0.57% for the DSP Healthcare Fund. But it is not higher than the category average of 0.76% by a large margin.
That said, it offers a diversified and well managed way to take exposure to the sector over the medium to long term especially if one has no pharma exposure in their portfolio. It can also be held in parallel with our other fund recommendation, the DSP Healthcare fund, while managing overall exposure to sectors funds at 10% to 15% of your overall portfolio.
Long-term SIPs in most sector funds (barring some themes) is not recommended. With pharma, investing part lumpsum and deploying in a phased manner on market corrections would be an ideal option. Else, SIPs over a maximum of 6 months can be done.
This fund is an equity oriented fund and will be taxed accordingly. You can read more about how mutual funds are taxed in this article.
19 thoughts on “Prime Fund Recommendation – A thematic fund to ride a sector on the uptick”
ICICI Pru Pharma Healthcare Diagnostics fund has been a steady performer in pharma space since years. What is the reason a relatively newer fund is recommended in this space over established ones? Just want to understand the research and rationale behind picking up a newer fund over an established one.
The rationale behind adding HDFC Pharma is explained in the report above. We already have an established fund (DSP Healthcare) in Prime Funds, that offered a differentiation from a traditional pharma fund with exposure to international healthcare stocks. HDFC is a new fund, but it has already been doing better than other pharma funds. In sectors, it is not necessary to always prefer an established fund over a new one – since we’re trying to play a specific theme, the fund that does it best in that time is the one to choose. – thanks, Bhavana
Hello Vidya,
How does HDFC Pharma fund look now ,with the proposed 25% Tariff by the US Govt? I am sure it will hit the bottom line of the Pharma companies exporting to the US like Sun, Cipla, Dr. Reddy, Aurobindo etc. The fund has lost about 8% from the recommended date. Yes I do understand the market has been on a deciine last few months. Do you have any further take on this call? Thanks
Hello Sir,
At the outset, it is important to note that at this point in time tariffs are only a threat. They may not actually materialise or final negotiations could result in a watered down version as compared to the 25% that was first proposed.
Having said that, if a tariff does come into force, it will affect some players more than others – namely exporters of finished generics / formulations. Domestic only players, MNC pharma companies and other domestic healthcare stocks like hospitals and diagnostics players will not be impacted. Some pharma players like Cipla also have US manufacturing facilities and this gives it some degree of protection.
We believe that the current correction could offer attractive entry points and we can expect that the fund manager will track and respond to the situation.
Hope this addresses your query.
Thanks
Hi Vidya and Pavitra,
With the new US dispensation making noise about raising tariffs on pharma, should we invest now or wait out till the clarity emerges on this front? And do you think this risk can have material impact on growth prospects of Indian Pharma upcycle?
Hello Sir,
Addressing your second question first – Reciprocal tariffs will affect one segment of pharma more than others – those who export finished generics or formulations. Domestic pharma players like MNCs, hospitals and diagnostics players are immune. Even among the players that cater to the US market, Cipla – one of the top holdings of this fund – for instance already has production facilities in the US (which it could possibly ramp up). This gives it some degree of protection from the current tariff situation.
Now coming to your first question on whether to invest or wait – we believe that a broad based correction like this one could offer attractive entry points and so yes this may be a good time to invest.
The sector is not new to such challenges and one way to navigate it is investing in the sector via a fund where you can expect the fund manager to track and respond to the situation as it evolves.
I hope this answers your questions.
Thanks.
Any updates on the effect of Trump tariff on Pharma story?
Hello Sir,
Reciprocal tariffs will affect one segment of pharma more than others – those who export finished generics or formulations. Domestic pharma players like MNCs, hospitals and diagnostics players are immune. Even among the players that cater to the US market, someone like Cipla already has production facilities in the US (which it could possibly ramp up). This gives it some degree of protection from the current tariff situation.
The pharma sector is not a simple one to navigate and regulatory and geopolitical challenges like the current one are not new. Which is why the fund route is a simpler way to invest in it where we can expect the fund manager to track and respond to any situation such as this one as it evolves.
Thanks.
Thanks for the recommendation. Can you please clarify or write a separate piece on our pharma industry’s substantial imports of API and other inputs from China? Can we rely on China to continue exporting raw materials to us when we are replacing them in the end user market? Thanks
Hello Sir,This is a question that does not have a simple answer. Despite making several strides and Government support measures, Indian pharmaceutical sector is still heavily dependent on China for APIs and intermediates. This is largely on account of the cost advantage that Chinese imports offer. API manufacture is also an asset heavy business. Further, stringent environmental compliance requirements need to be adhered too.
Indian companies have smartly used China as a source for cost-effective API and focused on drug filing, getting FDA approval etc. and have built capabilities on R&D – Custom synthesis- Mfg (CRO/CDMO) of complex APIs where realisation is better and can avoid competition with Chinese players.
Replacing China as a source of API may be a very gradual process with CRO/CDMOs doing it in complex molecules. But this will be a gradual, but accelerating trend in the long term.
As for whether China will continue to supply to us as we replace them is hard to assess.
Can i buy PHARMABEES instead of HDFC Pharma and Healthcare fund ?
The ETF’s weights and stock allocation are different from the active fund (HDFC Pharma). So they are not the same. It is up to you whether you want to hold a passive or active fund. Vidya
Hello Pavithra,
Very nice article with the reasons to invest in HDFC Pharma fund. I have invested couple of years back in ICICI Pru Commodities fund based on PI recommendation. Now it is under Hold.
I am thinking of exiting from ICICI Pru Commodities fund & invest the proceeding towards HDFC Pharma fund. Is it a good idea to swap?
Commodities is bottoming out. So not sure if this is the right time. If you do not have addl. funds, you may. Vidya
Hello Vidya, Thank you for your quick reply. I have limited additional funds but wanted to keep a check on number of Thematic funds, Since ICICI Pru Commodities fund is on hold, hence wanted to swap with HDFC Pharma fund.
The call has to be yours sir 🙂 I personally would not exit a sector when it is bottoming out, even if it takes tiem to revive. Vidya
Thank you Vidya. Well noted.
Hi, You mentioned that – “Long-term SIPs in most sector funds (barring some themes) is not recommended.
So which themes are suitable for Long Term SIPs – Consumption?
Thanks!
DG
COnsumption and IT and banking to some extent (keeping exposure low in banking, if you choose it since diversified funds already go overweight on it). But even in these sectors, some element of timing in between (cutting short SIPs when markets fall and investing as lumpsum, for example) can definitely help up returns. Vidya