How to Invest in Market-Linked Debentures

6 min read • Updated 1 February 2023
Written by Krishna Deshmukh
What is Market Linked Debentures (MLD) and How to Invest in it?

MLDs (Market-Linked Debentures) are market-linked debt instruments where the returns are not fixed. They have been structured to combine the attributes of investments in bonds and equities. 

The returns of MLDs are determined by the market movements of the underlying index/security. So, if the underlying index performs well, investors will receive high returns and vice versa.

Here we will explore some essential details related to Market Linked Debentures

How Do Market-Linked Debentures Work? 

Although the issuer decides what would be the underlying securities of MLD, it must be linked to the market, i.e. indices such as Nifty 50, Sensex or government/debt securities or equities. The details of these underlying securities with the terms and conditions are mentioned in the offer document issued to a holder of an MLD. 

MLDs are similar to bonds, and anybody can purchase them. But, generally, issuers offer them to high-net-worth individuals as they are structured to offer tax efficiency. The tenure of MLDs can range from 1 to 5 years. Returns are accrued and investors receive both principal and accrued returns upon maturity. 

Generally, corporates or investment banks with a net worth of a minimum of ₹100 crore can issue Market-Linked Debentures.

Market Linked Debentures (MLDs) are debt instruments that offer returns linked to the performance of an underlying financial market index. Previously, if an investor held an MLD for more than one year and then sold it, the returns were classified as long-term capital gains and were taxed at a lower rate of 10%. This was seen as an arbitrage opportunity as investors could enjoy lower tax rates on their returns.

However, this has recently changed, and gains from the sale of MLDs will now be taxed as short-term capital gains. This means that the returns will be taxed at the investor’s applicable tax slab, which could be higher than the previous 10% rate. This change is aimed at reducing the tax arbitrage and aligning the tax treatment of MLDs with other financial instruments.

Changes in the bond market after Budget 2023-24

Let us use an example to understand the working of MLDs better: 

Company A issued MLDs with Nifty 50 as the underlying index at a 12% coupon with a maturity period of 15 months. The offer document clearly states the conditions against which the coupon payment will take place, which let’s say if Nifty 50 does not fall more than 20%.

If by chance, the index falls more than 20%, the issuer will return only the principal amount and not any interest. This was an example of a principal-protected MLD, which is a type of MLD, we will explore further in the next section. 

What Are the Types of Market-Linked Debentures? 

Detailed below are the two main types of Market Linked Debentures:

  • Principal Protected 

The capital protection feature is the most important characteristic of principal-protected MLDs. Principal-protected MLDs provide investors with financial security. It guarantees that investors will receive their invested capital if the market spirals downwards. If the market movement is positive, the investors receive returns proportional to their investments. 

  • Non-Principal Protected 

These Market Linked Debentures do not provide the principal amount back to the investors in case of adverse performance of the underlying market index.. In India, the issuance of only principal-protected MLDs is allowed as per SEBI regulations. However, even in principal-protected MLDs, the payouts are subject to the credit risk of the Issuer company.

What Are the Features of MLDs?

Detailed below are the features of MLDs: 

  • SEBI (Securities Exchange Board of India) has reduced the face value  for  debt  securities/ market linked debentures  from Rs. 10 lahks to Rs. 1 lakh effective  January 1, 2023
  • Credit rating agencies assess and rate MLDs. AAA and AA+ rated MLDs are high-quality instruments with lower levels of risk. 
  • Investors do not receive a regular income from MLDs but receive a one-time payment after maturity. 

What Are the Benefits of MLDs?

Given below are the benefits of investing in MLDs: 

  • MLDs provide a suitable option for diversifying one’s investment portfolio.
  • Investors looking for higher post-tax investment returns prefer MLDs over other fixed-income instruments as in the case of listed MLDs, if the holding period is more than 12 months, LTCG at the rate of 10% is applicable. fixed/variable interest rates for short investment tenure prefer MLDs because of their high yield.
  • Principal-protected MLDs provide more stability and security when compared to pure equity-linked instruments, where investors face the risk of capital loss. This makes MLDs suitable in comparison to equity investments, for risk-averse investors.
  • Nowadays, many reputed websites offer Market Linked Debentures as an investment option catering to retail investors. So, investors can research and compare the risks and rewards offered by such instruments and select the MLD best suited for their financial goals. 

Things to Know Before Investing in MLDs  

Listed below are some of the important things to know before investing in MLDs: 

  • Most MLDs are principal protected, but it is important to assess the ability of the issuer to repay the principal. Otherwise, investors might face a loss of capital. 
  • Investors must thoroughly check the issuer’s underlying business and important financial ratios before investing in MLDs. 
  • The returns on the MLD are linked to a certain market index which is influenced by several factors like growth of the domestic economy, inflation, foreign economic conditions, stability of government, etc.

How to Invest in Market-Linked Debentures? 

There are multiple ways to invest in bonds. Moreover, people can compare various options available before finalising an investment. Here is a step-by-step guide for investing in MLDs:

  • Step 1: Formulate your financial goals and conduct thorough market research about the issuers offering MLDs.
  • Step 2: Based on your requirements, register on an online platform and start investing. 

If you are looking for carefully curated bonds, sign up & invest in bonds

Final Word

Investors are gradually becoming aware of the benefits of Market Linked Debentures. This has opened up investment opportunities in a new type of debt security for investors. MLDs are an attractive investment option for investors looking for higher post-tax returns. Even though MLD returns are market-linked, the principal-protection nature eliminates risk of capital erosion.

Frequently Asked Questions

What is the category of MLDs?

Market Linked Debenture (MLD) is a type of non-convertible debenture wherein the returns are not fixed but linked to the performance of a certain market index. These are structured fixed-income products with typically no periodic payouts except at maturity.

What is the minimum investment amount for MLDs?

The face value of Market Linked Debentures will be Rs. 1 lakh with effect from 1st January 2023. So, the minimum investment amount can be as low as Rs. 1 lakh, as defined under the terms and conditions.

Are MLDs safe?

MLDs fall under the regulatory purview of SEBI and are classified as debt instruments. Principal-protected MLDs are safe and secure investment options.

Who may want to avoid purchasing MLDs?

Investors who wish to invest in less complex and regularly paying investment options should avoid MLDs.

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Krishna Deshmukh

Investment Principal
Krishna is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.E. (Hons) in Computer Science Engineering from BITS Pilani and MBA (Finance) from JBIMS, Mumbai. He is currently working as Investments Principal at Wint Wealth. Previously he worked at Kotak Mahindra Bank at their DCM desk and Northern Arc Capital at their Structured Finance desk.

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