Market Linked Debentures (MLDs)
What is MLD?
Market linked debentures (MLDs) are debt instruments that generate returns based on the performance of a specific market index or instrument. In simple terms, these are debentures on which the interest rate is not fixed, but depends upon some external index like Nifty, Sensex, etc.
They are issued by companies or financial institutions.
How does MLD work?
MLDs are debt instruments issued by companies through a private placement route. They have a fixed maturity, from 12 months to 60 months. MLDs do not have fixed returns. The return on MLDs depends on the movement of an underlying market index or instrument, such as an equity benchmark, government yield, gold index, etc. The underlying index or instrument is pre-specified in the offer document of the MLD.
The returns on MLDs are paid at maturity along with the principal amount.
For example, a company may issue an MLD that pays a return of 20% if Nifty moves up by 10% in 36 months, a pro-rata return if Nifty moves between 0–10%, and 0 returns if Nifty is negative. In this MLD, an investor can participate in equity upside while at the same time protecting the principal.
Types of MLDs
Principal Protected MLDs
These are the most popular types of MLDs, offering principal protection while enabling participation in the equity market. They typically provide returns linked to a market index. Even if the market declines, you still receive your full principal back.
Non-Principal Protected MLDs
These MLDs allow participation in the equity market on both the upside and downside. The principal is not protected, and they usually offer higher returns compared to the principal protected versions due to the higher assumed risk.
Who should invest in MLD?
If you're a new investor with limited understanding of markets, it's best to begin your investment journey with mutual funds. However, if you have good investing experience, you should consider investing in MLDs.
Typical Use Cases of MLDs
- When your investment horizon is 3 to 4 years and you want to take exposure to the equity market.
- MLDs have a distinct risk-return characteristic, making them ideal for portfolio diversification.
- Principal protected MLDs are good instruments to take equity exposure without taking risk on the principal.
How to invest?
MLDs are private placement debentures issued by various companies from time to time. It can be difficult to track good opportunities on an ongoing basis. At Goalstox, we can help you select the right scheme to fit your goals and risk profile.