How broadening of Nifty Pharma Index will impact investors

While real estate investment trusts or Reits and infrastructure investment trusts or InvITs will be part of Nifty indices, stocks were replaced in some key indices such as Nifty Next 50, Nifty 500, Nifty FMCG and Nifty IT. The changes will become effective from 30 September.

One major reorganization happened in the Nifty Pharma Index, which will now have 20 companies as its constituents instead of the 10 at present.

Over the past year, the Nifty Pharma Index has delivered a return of around 25% compared with 47% given by Nifty 50 Index, as of 30 August.

By increasing the total number of pharma stocks to 20 from 10 previously, the free float coverage of pharma companies will increase to ~90% versus ~70% at present. Additionally, NSE Indices has added a rule to give preference to include stocks that are available for trading on the derivatives (F&O) trading platform.

On the Nifty Pharma Index becoming more broad-based, Vishal Jain, head ETF, Nippon Life India Asset Management Ltd, said: “We think that this is a very positive change by the NSE Indices. The objective of any index is to be representative of the underlying theme it reflects. Adding more stocks to the index will enable investors in the fund to get maximum exposure to pharma as a theme.”

According to experts, pharma, along with FMCG, are defensive and evergreen sectors. However, they say investors in Nippon India Nifty Pharma fund should expect some short-term jitters.

In line with the rebalances of various ETFs that happen regularly to align them with their respective underlying index, the Nippon India Nifty Pharma ETF is also expected to rebalance accordingly such that it closely tracks the revised Nifty Pharma Index.

“Considering that the universe of stocks in the underlying index has expanded, the fund will likely incur some additional expenses while buying into these stocks. It could also lead to some short-term transitional impact on its performance and lead to a higher turnover on the fund,” said Kavitha Krishnan, senior analyst-manager research, Morningstar India.

At the same time, the fund becoming more diversified is a positive move, considering that it helps mitigate portfolio level risks. “This is especially important when we look at a thematic or a sector fund,” Krishnan added. There are two ways to take positions in a sector, passive and the active route. So, the question arises: which route, active or passive, is better suited?

“If someone wants to go for purely pharma sectoral bet, then along with active they can look at low cost passive strategies as well, but if someone wants to have a mix of pharma along with healthcare space, then active would be a better way as margin of profitability and getting higher returns and beating the benchmark would be much more,” said Rushabh Desai, a Mumbai-based mutual fund distributor.

However, investors should remember that sectoral funds carry a higher risk because they could be cyclical in nature. Investing in a single sector portfolio entails a higher risk compared with investing in a diversified portfolio. “We think that it’s important to maintain a diversified portfolio and invest based on your goals,” said Krishnan.