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MLD

Market Linked Debentures

Market linked debentures or MLDs are non convertible debentures where the returns are not fixed. The returns of MLDs are linked to an underlying market index. The underlying index can be equity index, G-Sec index, Gold etc. The tenure of these schemes can range between 1 to 5 years. Unlike NCDs which pay periodic interest (coupons), the payout in MLDs takes place only on maturity i.e. on maturity you will get the principal and the accrued interest. However, the interest payout will be variable and linked to some market index.

Types of MLD

There are two types of MLD:-

Principal Protected

In these MLDs, your principal repayment is assured, irrespective of market movements. If the market movement is unfavourable e.g. market falls, even then you will get your principal on maturity. If you the market movement is favourable, then you will get the principal plus market linked returns on maturity.

Non principal protected

In these MLDs, your principal will be at risk if the market movement is unfavourable. While potential returns are higher in non principal protected MLDs, the risk is considerably higher.

Credit Rating

MLDs are rated by the credit rating agencies like CRISIL and ICRA. Credit rating of AAA or AA+ denote high safety (low credit risk).

Examples of MLDs

A Nifty linked debenture MLD may offer investors 75% of Nifty returns over the next 3 years (maturity). So if Nifty gives 40% absolute returns in the next 3 years, then you will get principal + 30% returns on principal. However, if Nifty falls then you will just get the principal (in case of a principal protected MLD).

Some MLDs have conditions attached to pay-off. For example, MLD may pay 10% interest if Nifty does not fall more than 60%. If Nifty falls more than 60%, then only the principal will be paid to the investor (in case of a principal protected MLD).

Taxation of MLDs

MLDs can be listed on stock exchanges or unlisted. If you sell a listed MLD after 1 year, then the capital gains will be taxed at 10%. This makes listed MLDs highly tax efficient. For unlisted MLDs, the capital gains on maturity will be taxed as per the income tax rate of the investor is held for less than 36 months. If unlisted MLDs are held for more than 36 months, then the capital gains will be taxed at 20% after allowing for indexation benefits.

Who should invest in MLDs?

The minimum investment amount in MLDs is Rs 10 - 25 Lakhs

Investors looking for higher returns than FDs

Investors looking to participate in market upside without taking any downside

Investors looking for tax efficient returns

MLD