Market Linked Debentures

Market Linked Debentures or MLDs are structured fixed income products which pays the principal and market linked returns on maturity. The returns are linked to performance of specific market indexes e.g. Nifty, Gold, and G-Sec etc., as specified by the issuer.

Risk Return
Hybrid Exposure
of Asset Class

How to invest in MLDs?

MLDs are structured products. Structured products are more complex than traditional fixed income investments and debt mutual funds. You should understand the product before investing.

You should clearly understand the different pay-off conditions and analyze different scenarios. You should assess what the worst case scenario is, the likelihood of the worst case scenario actually occurring and the risk-return trade-off before investing.

It is important to understand that even a principal protected MLD is not entirely risk-free. Credit risk will still apply. You should always evaluate credit risk- check the credit rating of the issuer.

MLDs of high credit quality allow you to get market linked returns (as per conditions specified by the MLD) without taking market risks.

These products are complex and suitable for experienced investors, HNIs etc.

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How MLDs work?
Let us understand with the help of a simple example of a hypothetical MLD.
Underlying Index:
Nifty 50
3 years
Basis of Coupon pay off:

(a) 8% annualized (XIRR) if Nifty value on Maturity > 50% of initial value of Nifty during issuance

(b) 0% if Nifty value on Maturity< 50% of initial value of Nifty

What will you get?
  • You will get the par value (principal amount) on maturity, irrespective of market movement (up or down). In other words, your capital is protected. In the worst case scenario, you will only get your principal back.
  • Let us assume that initial value of Nifty is 15,000. 50% of 15,000 if 7,500. So if Nifty stays above 7,500 you will get 8% annualized coupon payable on maturity.
What is the difference between plain vanilla NCDs and MLDs?
  • Plain vanilla Non Convertible Debentures or NCDs pay coupons (interest) at regular intervals and par value (principal) on maturity
  • MLDs do not pay regular coupons during the tenure of the debenture. It pays the principal amount plus a market linked pay-off
  • NCDs usually pay fixed coupons to investors
  • Coupons paid by MLDs depend on the performance on the underlying index
Principal protected and non-principal protected MLDs

In the above example, your principal is protected. However, in some MLDs there is greater linkage with market performance and your principal is not protected.

The risk characteristics of non-principal protected MLDs are different from a pure fixed income product; they are somewhat more similar to hybrid products. Investors usually prefer principal protected MLDs, but if you want greater participation in market returns then you can invest in non-principal protected MLDs. You should invest according to your risk appetite.

Taxation of MLDs

MLDs are listed in stock exchanges. If you sell your MLD after 1 year from date of purchase, long term capital gains tax of 10% (plus cess and surcharge will apply). Investors in higher tax brackets prefer to sell their MLDs in the exchange just before maturity at fair values to take advantage of LTCG taxation.

If you receive maturity proceeds i.e. principal + coupon pay-off, then the pay-off will attract debt taxation. If your investment tenure is less than 3 years, then the pay-off will be added to your income is taxed as such. If your investment tenure is more than 3 years, then pay-off will be taxed at 20% after allowing for indexation benefits.

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