SIP (Systematic Investment Plan) planning is a popular way of investing in mutual funds and stocks regularly over a period of time. By investing small amounts at regular intervals, SIPs help you overcome the volatility in the market and average out your purchase cost. The pharmaceutical sector in India provides opportunities for long-term growth through SIPs in pharma stocks.
Analysing the returns: SIP calculator
Before starting SIPs in pharma stocks, you need to estimate the potential returns and time period based on the company’s financials and industry growth rates. A SIP calculator is a useful tool to analyse historical returns as well as project future returns.
Let’s analyse the returns from a hypothetical ₹5,000 monthly SIP in a multinational pharmaceutical company over 5 years:
– Assume an annualised return of 15% (above industry average of 12-13% CAGR)
– Total amount invested after 5 years = ₹5,000 x 12 x 5 = Rs. 3,00,000
– Estimated value after 5 years = Rs. 3,00,000 x (1 + 0.15)5 = Rs. 6,29,096
– Returns = Value – Amount invested = Rs. 6,29,096 – Rs. 3,00,000 = Rs. 3,29,096
– Annualized returns = (Returns/Amount invested) ^ (1/Years) – 1 = 21.7%
This shows how a long-term SIP in a quality large-cap pharma stock can generate robust returns exceeding 15% CAGR through rupee cost averaging. SIPs help you overcome volatility and benefit from the power of compounding.
Identifying the right pharma stocks
With hundreds of pharma companies to choose from, identifying the right large-cap stocks to build a long-term portfolio through SIPs requires due diligence. Some key factors for evaluation include:
– Leadership position in chronic therapies/generics with consistent revenue, profit growth
– Strong balance sheet with low debts as well as good operating and net margins
– Favourable growth outlook backed by new launches and capacity expansion plans
– Diversified global sales mix especially in regulated markets like the US, Europe
– Compliance with global quality & regulatory standards
– Management pedigree, R&D investments, and a pipeline of products
Building a diversified portfolio
While individual leading pharma stocks provide growth, it is prudent to build a diversified SIP portfolio across 5-8 pharma companies from different segments/sub-sectors. This reduces company-specific risks.
A balanced pharma portfolio could include the following:
– Large-cap generic manufacturers
– API manufacturers
– Contract research players
– Specialty focused firms
– Pharma services companies
By dividing your monthly investment amount equally among selected stocks, you minimize volatility and maximise the benefits of rupee cost averaging over 10-15 years. Rebalancing every year helps with maintaining the desired allocation.
Importance of review and exit strategy
Periodically reviewing company performance against predefined parameters is important for SIPs. Fall in revenues/margins, high debts, supply disruptions, or failures in product pipelines could warrant an exit. It is advisable to exit partially or fully if the investment thesis no longer holds strong, even if the share price has not appreciated significantly. Booking profits and reallocating is prudent after 15-20% annual returns in 3-5 years.
The exit strategy maintains discipline and helps take advantage of new investment opportunities. Partial stake sale also ensures some realized long-term capital gains.
Conclusion
The opportunities presented by India’s sunrise pharma sector through stable industry tailwinds perfectly complement the SIP framework of regular investing in quality names. Back-testing tools like an SIP return calculator help with selecting the right portfolio optimized for returns over 15-20 years. Periodic reviews and a pre-planned exit help ride the market cycles successfully. With the right stock choices and discipline, SIP offers a rewarding mechanism to generate long-term wealth from this resilient sector.
