Market Linked Debentures (MLDs): Invest , Meaning, Types & Benefits (2024)

FAQs

Market Linked Debentures (MLDs): Invest , Meaning, Types & Benefits? ›

MLDs come with a Capital Protection feature wherein here it is guaranteed that you will get back at least the principal amount on maturity, even if the movement in the other market is severely adverse i.e., your downside is protected because in the worst case, you will get zero return but will get your investment ...

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%.

While these products seem like a decent alternative to regular fixed income products, risks in such products are not properly conveyed to the investors. Credit quality of the issuer assumes great importance in this case, there may be no third party source available to check the credit quality of the entity issuing MLD.

MLDs are issued by companies or financial institutions through a private placement route. They have a fixed maturity period ranging from 12 to 60 months. The returns on MLDs are not fixed but depend on the movement of an underlying market index or instrument, such as equity benchmark, government yield, gold index, etc.

MLDs typically don't have interest payments. Hence, you need not worry about reinvestment risk. But that also means that they are more volatile than normal bonds. But MLDs have a different risk that other Bonds are not subject to - market risk.

Non-principal protected MLDs: The issuing company does not guarantee the repayment of the capital invested by the investor in such types of MLDs. The investor is exposed to market risk; however, the investor also enjoys the benefit of higher return potential as compared to principal protected MLDs.

Market-linked Debentures Taxation: Before and After 1st April 2023. Till March 2023, MLDs held for over a year and generating capital gains were taxed at a flat rate of 10%. Plus, unlike other debt mutual funds, MLDs did not have a gestation period of 3 years to be categorised as a long-term capital asset.

Maturity – Market-linked Debentures have a fixed date of maturity, and the investor is only liable to get the principal amount along with earned interest at that point in time only. Returns – The return on investment in MLDs depends on the market index.

Gains arising on the transfer of a listed MLD after a period of 12 months but before its maturity period are treated as Long Term Capital Gains and are subject to the applicable tax rate of 10% plus applicable surcharge, just like any other listed debt security.

Debentures: Debenture holders bear lower risk compared to shareholders. They have a fixed claim on interest payments and repayment of principal. Shares: Shareholders assume higher risk as returns are tied to the company's performance. They may benefit from capital appreciation, but there is no guaranteed return.

What is the minimum investment in MLD? ›

Before the 2023 Budget, the minimum face value for an MLD was ₹10 Lakh now this has been lowered to ₹1 Lakh to allow retail participation.

In simple words, MLDs have lost the equity tax advantage and are subject to debt taxation (normal tax rate as per income slab), bringing them on par with other debt products. From April 1, 2023, MLDs will be just another debt instrument, with no tax advantage.

MLDs come with a Capital Protection feature wherein here it is guaranteed that you will get back at least the principal amount on maturity, even if the movement in the other market is severely adverse i.e., your downside is protected because in the worst case, you will get zero return but will get your investment ...

Equity-linked debentures are debt instruments incorporating an option to acquire an equity stake in the issuer, its parent, or another company at a predetermined fixed price. This option can be exercised through the conversion of existing debt or by utilizing the right to purchase.

Principal Protected MLDs allow you to remain invested in the Market without risking your capital and profits, so you get only the upside without the downside. Diversification: For someone looking to diversify from Equity, MLDs provide a good alternative. MLDs have lower risk & volatility as compared to Equity.

The biggest difference between stocks and bonds is that with stocks, you own a small portion of a company, whereas with bonds, you loan a company or government money. Another difference is how they make money: stocks must grow in resale value, while bonds pay fixed interest over time.

Return Potential: While MLDs offer variable returns linked to a market benchmark, NCDs provide fixed returns.

Market Linked Debentures or MLDS can be stated simply as debt securities where the return on investment the investor gets totally depends upon the market index's performance. Market Linked Debentures are basically fixed-income structured products that give no periodic coupons but pay only at maturity.

Market risk and potential for loss:

Investing in MLDs involves exposure to market risk. The value of MLD investments can decline if the underlying asset or index depreciates. Therefore, it is essential for investors to carefully assess their risk tolerance before committing to MLDs.