Most first-time investors may be better served by diversified options such as flexicap or multi-cap funds, which already hold pharma and healthcare stocks.
Healthcare funds, a thematic category, belied investors' hopes in 2025.
These schemes lost 2.9 per cent on average in calendar year (CY) 2025.
This was a sharp reversal from their strong run in CY23 and CY24, when the category returned 34.7 per cent and 39.6 per cent, respectively.
Sharp Reversal From Strong Returns
"Underperformance was driven by tariff uncertainty, price erosion fears in certain limited-competition products for largecap export generic pharma companies and start-up losses from new hospitals for some hospital names," says A Anandha Padmanabhan, senior fund manager-equities, PGIM India Mutual Fund.
Tariff and Price Erosion Risks
Healthcare funds are required to invest at least 80 per cent of their assets in healthcare stocks.
Their universe includes pharmaceutical companies, corporate hospital chains, diagnostics firms, and manufacturers of healthcare equipment and consumables, as well as standalone health insurance companies.
Some schemes also take exposure to overseas-listed healthcare companies.
Defensive Sector Perception
The healthcare and pharma sector is often viewed as a defensive bet due to its relatively steady performance.
"The sector is relatively defensive with the potential for steady, compounding cash flows and healthy returns on equity (ROEs)," says Vrijesh Kasera, fund manager – equity, Mirae Asset Investment Managers (India).
"Given the breadth and technical nuance, dedicated healthcare funds offer a convenient way for investors to access this evolving opportunity set," adds Kasera.
As of December 31, 2025, 30 healthcare schemes managed assets worth Rs 34,548 crore. Of these, 12 were passively managed.
Long growth runway
Over the long run, the category could benefit from structural tailwinds.
"After the 2025 correction, valuations are more reasonable, and the medium-term setup looks better," says Nirav R Karkera, head of research, Fisdom.
"Key positives include a large global patent expiry cycle starting 2026, GLP-1 (glucagon-like peptide-1, for diabetes treatment) opportunities in India and other markets, and India gaining share in global manufacturing under China+1," adds Karkera.
Long-Term Structural Tailwinds
Rising health insurance penetration could support healthcare services, alongside medical tourism and sustained demand for affordable pharmaceuticals and consumables.
"Structural demand-supply gaps, rising insurance penetration and a shift to higher value care create a long runway for multi-year growth," says Padmanabhan.
"The recent relative underperformance to broader markets provides a sensible entry point to longer-term investors," adds Padmanabhan.
Valuations Turn Reasonable
The sector remains vulnerable to regulatory changes, including price controls, and intensifying competition from new entrants adopting modern technology.
"Regulatory risk, especially for pharma manufacturers, can affect operations and profitability, leading to near-term volatility in fund performance," says Kasera.
"Other risks include execution on capacity additions (notably in hospitals) and the near-term generic patent cliff," Kasera adds.
"Regulatory intervention in the form of drug price caps, policy changes, USFDA (United States Food and Drug Administration) actions and government interventions are some of the risks associated with the sector," says Padmanabhan.
Being a sectoral offering, healthcare funds also carry concentration risk.
For aggressive investors
These schemes suit relatively aggressive investors as a satellite allocation.
"These funds are for investors with higher risk tolerance who want sectoral diversification and are comfortable with regulatory and product-cycle volatility," says Karkera.
"Sectoral funds suit investors with a horizon of 3-5 years who can tolerate short-term fluctuations. It is sensible to allocate 5 to 10 per cent of the overall portfolio to sectoral funds," says Kasera.
Most first-time investors may be better served by diversified options such as flexicap or multi-cap funds, which already hold pharma and healthcare stocks.
"Those seeking predictable short-term returns or those already heavily exposed to pharma stocks should avoid concentrated allocations," says Karkera.
A systematic investment plan (SIP) combined with a strategy of buying lump sum on dips may work over the long term.
Key Points
- Healthcare funds underperformed in 2025, losing about 2.9% on average after two strong years.
- Tariff uncertainty and price erosion fears in pharma weighed on returns.
- Despite the setback, the sector is still seen as structurally defensive with long-term growth drivers.
- Valuations have cooled, improving the medium-term risk–reward equation.
- Best suited as a satellite allocation (5% to 10%) for aggressive, long-term investors.
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Feature Presentation: Ashish Narsale/Rediff
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