Is it worth holding Reliance Pharma Fund or exit from it

In the last one year Reliance Pharma fund gave a return of 14%, at a time when the market fell by 6 to 7%. Average equity fund returns were also in low single digits, with large cap oriented equity funds giving negative returns. So overall, you should be happy if you have held this fund for a year or more. If you have not completed a year, then you should hold the fund otherwise you will pay a short term capital gains tax of 15%. The question is should you continue to hold it or book profits, if you have held the fund for over a year. You should note that a sector fund requires you to time your exit in order to get the best returns. Pharma is a defensive sector and tends to outperform when cyclical sectors underperformed. The last one year has been extremely volatile and tough for equity markets, especially cyclical stocks (e.g. banks, capital good, infrastructure etc). The rough start to the year on the back of China and crude worries, along with the weak sentiments in US and Europe, is suggesting that volatility will continue for some time. Therefore pharma may continue to outperform the broader market. Further, large cap pharma stocks like Sun Pharma, Cipla and Dr Reddy’s have had a rough ride over the past few months. These three stocks comprise 25% of Reliance Pharma portfolio. If these three stocks recover before the broader market recovers, the margin of outperformance of pharma funds may be much higher.

However, within the category of Pharma funds, Reliance Pharma fund is clearly underperforming compared to SBI Pharma fund, which nearly 25% returns in the last one year. It is always very difficult to predict which mutual fund will do better in the future, but going by past performance, if you want to remain invested in Pharma for longer timeframe, you can consider shifting your investment to SBI Pharma fund. On the other hand, if you expect the market to recover sometime next year, then you can remain invested in Reliance Pharma fund and then switch to diversified equity funds like Reliance Top 200 fund or Reliance Equity Opportunities when you have a confirmation that the market has bottomed out or if you see an improvement in earnings growth in the next few quarters.