Use MFs to invest in defensives

It's easier and less riskier. Just be sure you go slow and steady now

Investing in pharma or healthcare stocks directly can be downright nerve wracking. Do you know how various pharma companies are placed in their business plans or how their new drug pipeline will pan out? Could you say with foresight, which stocks can become the next Ranbaxy? To get the best out of the traditional defensive sectors, it s often better to take the mutual fund route.

As fund managers buy a bunch of these stocks in their portfolio, it often cuts the risk of holding individual stocks, especially in a sector that has many drivers to growth and valuations. This way, while the investor gets to play on the upside of the sector, it simultaneously pares down the risks of holding individual stocks. Says Suresh Sadagopan, certified financial planner: "Choosing a stock is very difficult for individual investors in the pharma space as some companies are in research and development, others in formulations or generics or bulk drugs. Besides, policy actions like Drug Price Control Order (DPCO) announcements can impact some of these companies' margins disproportionately."

Besides, these defensive sectors have delivered on their performance in the last one year. Pharma sector mutual funds returned 27 per cent in the last year, where just half the companies in the BSE Healthcare index managed to gain as much in the last one year. Likewise, FMCG funds returned 36 per cent in the last one year, while just six of the 10 stocks on the BSE's FMCG index returned over that. Besides, the Sensex and Nifty returned 23 and 22.50 per cent, respectively.

While defensive sectors have shown tremendous growth in the past few years, they will continue to do well in the coming years thanks to falling rupee and rising domestic consumption. That is the reason why Hemant Rustagi of Wiseinvest Advisors feels that these two sectors are much more than just defensives in terms of growth and if one is looking for sectoral exposure pharma and FMCG must be considered. Rustagi recommends taking up to 10 per cent of exposure of your equity portfolio in sectoral themes such as pharma and FMCG.

Once again, use mutual funds to take exposure in defensives, and don't go it directly. Mutual funds may be able to give better risk-adjusted returns than stocks in these sectors, agree experts. Because, while a fund is diversified within the sector, one cannot buy all the stocks individually. This helps reduce the risk or the volatility of a fund significantly, compared to say a holding on to a few FMCG or healthcare stocks in your portfolio.

Invest in these themes only if you must. Assess your overall equity portfolio and invest only if you have very little exposure to these themes. If you are already exposed to these sectors, you might increase your risk to one sector. Hence, 10-15 per cent of your portfolio could be defensive funds. If you want to take a stronger position, up your holdings in pharma and healthcare funds to 20-25 per cent.

It is a good idea to enter slowly into these sectors. Certified financial planner Suresh Sadagopan feels defensives, especially FMCG, has run up quite a bit in comparison to the broader markets. Even though the sector might do well, he feels investors should be cautious when investing in these themes.