Best Pharma ETFs in India: Nifty Pharma ETFs

What are Pharma ETFs?

A pharma ETF is a passively managed exchange-traded fund that tracks a pharmaceutical sector index. In India, the primary benchmark is the Nifty Pharma Index, which comprises the 20 largest listed pharmaceutical companies by free-float market capitalisation. A pharma ETF focuses primarily on pharmaceutical companies: drug manufacturers, Active Pharmaceutical Ingredient (API) producers, and formulation companies.

Overview of the Pharma ETF in India

• Nippon India Nifty Pharma ETF (PHARMABEES): The Nippon India Nifty Pharma ETF, listed on the NSE under the ticker PHARMABEES, is the only exchange-traded fund in India that tracks the Nifty Pharma Index. Launched in July 2021 by Nippon India Mutual Fund. The fund is mandated to invest at least 80% of its assets in the stocks constituting the Nifty Pharma Index. It replicates the index by holding the same 20 pharma stocks in roughly the same weights.

How to Invest in Pharma ETFs in India?

Investing in pharma ETFs in India is straightforward:

1. Open a demat/trading/stockbroker account. You can open a demat account with smallcase!
2. Use the Tickertape Stock Screener to analyse the pharma ETF, including share price, AUM, tracking error, and historical returns to evaluate whether the ETF aligns with your investment approach.
3. Place a buy order

Taxation of Pharma ETFs in India

Pharma ETFs in India are classified as equity-oriented funds for tax purposes, since they invest predominantly in equity shares of listed pharmaceutical companies. The capital gains tax treatment follows the post-Budget 2024 rules:

• Short-Term Capital Gains (STCG): If units are sold within 12 months of purchase, the gain is classified as short-term and taxed at a flat rate of 20%.
• Long-Term Capital Gains (LTCG): If units are held for more than 12 months, gains are classified as long-term and taxed at 12.5%, after the annual exemption limit of ₹1.25 lakh across eligible equity investments.
• Dividend Taxation: Any dividend distributed by the ETF is added to the investor’s total income and taxed at their applicable income tax slab rate. TDS at 10% may apply if the dividend exceeds ₹5,000 in a financial year.

Features of Pharma ETFs in India

• Sector-Specific Exposure: A pharma ETF provides exposure to multiple pharmaceutical companies through a single investment. This reduces the need to research and select individual stocks.
• Intraday Trading: Pharma ETFs trade on the stock exchange during regular market hours. Investors can buy or sell units at market prices throughout the trading session.
• Low Expense Ratio: Pharma ETFs generally have lower expense ratios than actively managed sector funds. This is because they track an index instead of relying on active stock selection.
• Transparent Holdings: The index composition and stock weights are publicly available. Investors can check which companies the ETF holds and their allocation in the portfolio.
• No Exit Load: Pharma ETFs generally do not charge an exit load. However, investors may still pay brokerage fees, taxes, and other exchange-related charges when buying or selling units.

Advantages of Investing in Pharma ETFs

• Exposure to the Pharmaceutical Sector: India is one of the world’s largest pharmaceutical producers and a major supplier of generic medicines. A pharma ETF provides exposure to listed companies that may benefit from domestic healthcare demand, exports, and long-term industry growth.
• Diversification Within the Sector: A pharma ETF spreads investment across multiple pharmaceutical companies. This reduces dependence on the performance of a single company, drug portfolio, regulatory approval, or geographic market.
• Lower Investment Costs: Pharma ETFs generally have lower expense ratios than actively managed sector funds because they track an index. Lower costs allow a larger share of the index’s returns to flow through to investors.
• Exposure to Global Generic Medicine Demand: Several Indian pharmaceutical companies sell generic medicines in markets such as the US and Europe. New drug approvals and patent expiries may create business opportunities for companies represented in the index.
• Simple and Transparent Structure: Pharma ETFs follow a defined index methodology. Their holdings and stock weights are publicly available, which makes it easier for investors to understand how the portfolio is structured.

Risks of Investing in Pharma ETFs

• Regulatory and Approval Risk: Pharmaceutical companies operate under strict regulatory rules. Warning letters, import restrictions, product recalls, or delays in drug approvals can affect a company’s revenue and share price. Regulatory action against a large index constituent may also affect the ETF’s performance.
• Pricing Pressure in Export Markets: Many Indian pharmaceutical companies earn a large share of their revenue from generic medicines sold overseas. Higher competition, buyer consolidation, or changes in drug-pricing policies can reduce prices and profit margins.
• Sector Concentration Risk: A pharma ETF invests only in pharmaceutical companies. If the sector underperforms the broader market, the ETF has no exposure to other sectors that could help offset the decline.
• Currency Risk: Companies with large export businesses earn revenue in foreign currencies. A stronger Indian rupee can reduce the value of overseas revenue when converted into rupees, which may affect earnings and stock prices.
• Tracking Error: A pharma ETF may not match the index’s returns exactly. Fund expenses, cash holdings, dividend reinvestment, and corporate actions can create a difference between the ETF’s performance and the index it tracks.

Factors to Consider Before Investing in Pharma ETFs

• Underlying Index: Check whether the ETF tracks a pharmaceutical index or a broader healthcare index. A pharma index mainly includes drug manufacturers, while a healthcare index may also cover hospitals, diagnostics, and medical device companies.
• Expense Ratio and Tracking Difference: Compare the ETF’s expense ratio and tracking difference. The expense ratio shows the annual fund cost, while the tracking difference shows how closely the ETF’s returns have matched its underlying index.
• Liquidity and Trading Volume: Review the ETF’s average trading volume and bid-ask spread. Lower liquidity can make it harder to buy or sell units at the desired price, especially when placing large orders.
• Regulatory Exposure: Pharmaceutical companies face approvals, inspections, warning letters, and other regulatory actions. These developments can affect the share prices of index constituents and, in turn, the ETF’s performance.
• Existing Portfolio Exposure: Check how much pharmaceutical exposure is already present in the wider portfolio through other funds or direct stocks. Adding a pharma ETF may increase sector concentration beyond the intended level.