Market- Linked Debentures is the new buzzword that has taken the financial world by storm. So, what exactly are they? to state it simply, it is a financial instrument whose returns are not fixed but are linked to the movement in the underlying security. The underlying security could be an equity benchmark, government yield, or gold index.

Why should an investor consider Market-Linked Debentures?

The major benefit of investing in MLRs is that it helps an investor enjoy high returns in case there is an upside in the linked security without having to take as much risk as investing directly into the asset.

For eg: If you directly invest in the Nifty index for a period of 1 year and if during that period the Nifty underperforms then you can lose a part of your principal amount i.e the amount you have invested, whereas if you invest through MLR your principal amount is protected in case of underperformance by the linked security, in this case, the Nifty index. But had it performed well, you would have received the return accrued from the Nifty index on top of your principal amount.

What are the Features of MLDs?

• The minimum investment amount in MLD's is Rs 25 Lakhs and for that reason often
• MLDs are issued with a period of 1 to 5 years
• MLDs do not pay any regular income unlike bonds do. The payment for MLD's are made only when it matures
• They are generally issued with a tenure of one to five years and are regulated by the Securities and Exchange Board of India (SEBI)
• MLDs can be cutomised easily as per the investor's need
• MLDs come with a Capital Protection feature wherein here it is guaranteed that you will at least get back the principal amount on maturity, even if the movement in the other market is severely adverse. But if the market has performed well, you get good returns as well as your principal amount
• MLDs are rated by independent Credit Rating Agencies.

Who can buy MLD's ?

Just like bonds, MLDs are available to anyone interested in them but are usually sold to High Net Worth Investors (HNIs). The reason is that they come at a face value of 10 lakh per MLD which usually tends to be more affordable for the moneyed. MLDs often are structured in such a way that they are tax-efficient of returns to HNIs.

What are the risks associated with MLDs?

Now MLDs promise a generous post-tax return and capital protection but What's the Catch? The company which offers MLDs with high tax returns is most likely because it could not secure a low-interest loan from a bank therefore they are offering higher interest rates which are tax-efficient. That means the threat of defaulting by the company persists, this is called Credit risk.

Before investing in MLDs it is important to do due diligence on the issuer's business, key financial position, and diversification to understand the ability of the company to repay.

Who should not buy MLD's?

MLDs are not just instruments that offer Capital Protection and allow you to mitigate the risk of investing directly in the market. These instruments have a lot of underlying nuances, which can be complex for the ordinary investor. The entire process is based on trust that the company you are giving a loan to will be able to repay. Investors who are looking just for safety and do not understand the complexity of the instrument should most definitely avoid it.