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My returns from Nippon Pharma are at 65 per cent. Should I exit?

Your decision about when to buy or exit an investment should be guided by your asset allocation plan instead of the market outlook, advises Dhirendra Kumar

In addition to large- and mid-cap mutual funds, I have invested Rs 10 lakh in Nippon India Pharma Fund and it is up by 65 per cent. Should I exit now or wait for another two-three years? Please advise whether it would be good to exit if pharma is in its peak valuation.
- Ramesh

I don't know. Pharma may still do better. It had been in slumber for a couple of years and it has made a huge comeback in recent times and some of these companies have also gone about fixing their problems. Over the past five years, pharma companies have faced several issues, such as FDA compliance and changes in regulations, which compelled the Indian pharma sector to modify their compliance practices to conform to changes in regulations. Indian companies now need to ensure that they meet the global standards, as they don't just produce for the domestic markets but also for the global market. So, when they faced problems, the hate winds, some of them went to fix it, while some of them started mounting very ambitious plans.

With regard to this pharma fund that has gone up by 65 per cent, that itself is not a good enough reason to sell it. If you have invested in this fund because you have a deep understanding of the sector, then keep it. But if you don't have an understanding of the sector and earning 65 per cent returns is making you very happy, then you should rather invest in a diversified equity fund. Even your diversified equity fund will be having exposure to pharma today. I believe you should have an asset allocation plan, which would guide you when to buy or exit based on the rebalancing of your portfolio. Even if you understand the sector and believe that pharma still has a lot of potential and future promise, make sure that the allocation to it does not exceed a certain limit of your total portfolio, say 10 per cent. Any time this 10 per cent becomes 15 per cent of your overall investments, you should rebalance the portfolio. Frame rules around your finances. Don't frame rules based on the outlook because we don't know what may happen to the market and some of these biggest turnarounds happen when we least expect it.

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