NFO Review: Mutual Fund Industry’s First Hybrid Balanced Fund

All investors aim for a seamless journey to build wealth. However in reality, markets are erratic, moving up or down and leaving many investors coping with strong emotions. When market goes up, the emotion is torn between booking profits and while some may want to invest even more, believing the market will always work for them. And when the market goes down, the emotions can range from pain of losing their hard earned money to outright panic. In an attempt tosave investors such dilemma in different market cycles, 360 One AMC has launched its NFO 360 ONE Balanced Hybrid Fund. The NFO is open from 4^th to 18^th September.

Understanding the Background

This will be the first fund in the Balanced Hybrid Fund Category in the industry. When SEBI came out with its scheme categorisation in 2017, it allowed AMCs to have one of the two hybrid funds in its product suite – either the Balanced Hybrid Fund, which will invest 40-60% in equity and balance in debt or the Aggressively Hybrid Fund – a fund that will maintain equity exposure from 65% to 80%.

Since Aggressively Hybrid Funds tend to maintain at least 65% at all times, they enjoy equity taxation, i.e. if the holding period is more than 1 year, long-term capital gains of up to Rs 1 lakh is tax-freeand taxed at 10% thereafter. All non-equity funds were treated with a single taxation rule where long-term capital gains were taxed at 20% with indexation if the holding was more than 3 years, while holdings of less than 3 years was considered as short-term, and the capital gains tax was as per tax slab. Therefore, investors always preferred equity taxation. In the 2023-24 Finance Bill, there has been a change in the taxation rules. Instead of two categories of funds, now there are three categoriesof funds – Equity, Non-Equity and Debt.

^*Above capital gains tax above Rs 1 lakh per annum

Due to these changes, investors have started showing interest in non-equity funds. As many AMCs already have funds in the Aggressively Hybrid Fund, there was a product gap in the space, which 360 One Asset AMC is fulfilling.

About the AMC

360 One Asset AMC is part of the 360 One Group. The group is among the largest asset managers in India. In its earlier avatar, the group was known as IIFL Wealth Management. The group has a presence in 7 countries and 23 locations in India. It offers wealth management, asset management, portfolio management, investment products, treasury services, estate planning and lending. At 360 ONE Asset Management, their focus is more on the alternate business. The AIF presence is about 7%-8% of the market share. The assets under management (AUM) for AIFs and Portfolio Management Services (PMS) combined stand at approximately Rs 60,000 crore.

Fund Investment Strategy

Depending on market conditions, the fund will maintain equity and debt allocation between 40% and 60%.

Equity: For the equity portion of the portfolio, the fund will follow a multi-cap approach. In terms of stock selection, it will adopt a bottom-up approach, utilizing the Unique SCDV Framework.

The purpose of the framework is to ensure that the fund will be investing in growing companies that can have a scalable business over time. Focusof the fund managers will be to understand the pricing power and benign competitive landscape for the business. Through active research the fund managers will aim to avoid sectors that are vulnerable to high regulation or where the competitive intensity is very high. Another set of companies that they try and avoid are those which have short growth cycle and the technological changes can be fast and the company may become redundant since these factors make it very difficult to assess the future projections.

One of the quantitative metric used by the team is to look out for industry or potential sectors for companies with competitive advantages, delivering higher ROEs than peers. Meanwhile, avoiding companies with poor free cash flows and declining market share. Also, there is considerable weightage onestablishing if the managements have clear strategies on how they will be generating shareholder value over long term. And avoid companies with frequent equity dilutions excess leverage and unrelated investments offering a favourable risk-reward ratio. The Fund Managers also ensure that valuations are not the sole investment criteria but a wholistic approach is taken while selecting a company for the portfolio.

The most interesting part of the philosophy is that the fund presentation categorically mentions, 'Avoid value traps and short-term fads'. This can have the most positive impact on the fund's performance over the long term although the journey can be painful over the short term.

“Only when the market is trading at extreme valuations, the fund will adjust its equity allocation by 5%”, said Anunaya Kumar, President and Head of Sales and distribution at 360 ONE AMC. This ensures that the fund manager will be cognizant of the overall market valuations.

Debt: Kumar has explained the philosophy as, “Debt side our philosophy is to focus on ‘Sustainable Returns’ with Safety and Liquidity. The investment management process relies on analytics and research to achieve risk-adjusted returns in each product category, thereby defining an asset allocation and duration strategy that matches the risk characteristics of the corresponding schemes.”

For the Hybrid Balanced Fund, the fund manager will focus on the following:

• Style: Accrual-driven strategy with a focus on maintaining the highest credit quality (80%-100% AAA allocation)


• Duration: Low-interest rate risk, aims to maintain a modified duration of 2-3 years.


• Relative Safety: Endeavour to maintain a minimum 80% allocation in AAA Corporate bonds and Sovereign bonds, and 20% allocation will never go below AA+


• Tactical Opportunity: The fund may take exposure to Government Securities (G-Secs) to gain tactical opportunity from volatility in duration.


• Liquidity: Relatively liquid portfolio primarily composed of Sovereign and AAA Corporate bonds

Why you should invest in 360 ONE Balanced Hybrid Fund?

• Balanced asset allocation: Many investors prefer a balanced asset allocation of 50% equity and 50% debt. The 360 ONE Balanced Hybrid Fund, for now, will be the only hybrid fund maintaining an allocation range of 40%-60% in equity and 60%-40% in debt.


• Highest pure debt allocation: The fund offers highest pure debt allocation of approximately 50 - 60% as against other equity oriented hybrid categories offering pure debt of 30-35%


• Unique positioning: Investment in pure equity and debt assets, aiming to maximize risk adjusted returns. The fund will not invest in arbitrage opportunities or other asset types.


• Taxation: As the fund will maintain equity allocation of above 35% at any given point in time, the long-term capital gains (LTCG) earned will be eligible for indexation benefit. LTCG shall be taxed at 20% after indexation after 3 years.

Why is this a good time to invest in 360 ONE Balanced Hybrid Fund?

• High Valuations: Considering the current record-high levels in the equity market, opting for a Balanced Fund could be a strategic decision.


• Long Term Wealth: Asset allocation plays a pivotal role in long-term portfolio returns. The equity portion of the fund can create wealth over long investment horizon.


• High Yieldson the Debt side: Yields are looking attractive since they are trading at historically high levels.


• Recent Taxation Changes: With Debt and Debt Hybrid Funds taxed at marginal rate, investing in Balanced Hybrid Fund still offers Indexation benefit at slightly higher risk

Who should invest in this fund?

• First Time Investors


• Investors seeking a blend of Debt and Equity exposure while minimizing volatility.


• Investors who have an investment horizon of 3 years and above. Investors seeking options beyond conventional fixed income investments.


• Retired individuals aiming to generate tax-efficient returns compared to traditional fixed income options.