What are Market Linked Debentures?

In the previous post, we discussed Non-convertible debentures, how they fetch you better returns from your traditional FDs and what are the risks associated with it.

let's look at another type of investment opportunity from a similar asset class called MLDs, which stands for MArket linked Debentures.

These are non-convertible debentures, but the returns are not fixed but linked to the market. Take fixed deposits, for example, they?provide you principle along with interest, and the returns are determined by the performance of the underlying index. The underlying index could be an equity benchmark, government yield, gold index etc.

So Let’s take a look at what sets MLDs apart from other investment opportunities

One of the major reasons why MLDs are popular among High net worth individual investors is its tax advantage. If you sell an MLD after one year, They attract just 10% capital gain tax, not three years like debt mutual funds; Now think about this from a perspective of an investor at a 30% tax bracket, he only has to pay flat 10% gain on profits from MLDs

another amazing feature is called as Principal Protected MLDs

to understand this, let's compare it with a fixed deposit where you have invested 10L, If your bank defaults by any chance, DIGC will pay you back up to 5L rupees only, But in the case of principal protected MLDs you will get your entire amount invested in case of defaults.

Let’s say a company named ABC issues an MLD that pays a coupon of?9% per year, maturing in 18 months.

But that 9% is only given?on a particular condition: if the Government Bond maturing 2030 does not fall 25% in price when measured exactly on the 13th month (But this is next to impossible or has a very low probability.)

If the government bond has fallen that much, you get only your principal back without interest, and the chances of this happening are very rare.

So, let’s look at some Key Features you need to know before investing in MLDs.

• The minimum amount of investment in MLD is 10 Lakhs
• They are generally issued with a tenure of one to five years
• They are regulated by SEBI (The Securities and Exchange Board of India), which makes it safer for investors
• MLDs are rated by independent Credit Rating Agencies (a screenshot of two MLDs by HEro corp and Muthoot will be displayed with their ratings)
• Unlike a bond that pays a fixed interest either monthly, quarterly, half-yearly or annually, MLDs do not pay any regular income; payment is made only at maturity, as discussed before

well, here are some risks that are associated with MLDs you should know before investing in them

Credit Risk: You’re lending to some company that can probably not get a low-interest loan from anywhere else, so they’re offering a higher interest rate to you that’s super-tax-efficient. This could result in the company defaulting, but you can avoid this by going through credit ratings before investing.

Liquidity Risk: Hey, know how we talked about tax advantage, and the Protected principle does not apply if you exit MLD in the middle; the guarantee only applies if you stay till the end.

So now that we have discussed the advantages and risks associated with MLDs, let's see where you can buy or invest in one of these. MLDs are typically sold by distributors or investment banks, who get commissions from such products, usually around 1% to 2% of the entry load. MLDs are restricted to a minimum (and multiple of) Rs. 10 lakh per MLD and are usually issued through an offline process. in the future, you will be able to buy MLDs through our platform Altius Investech.